Five Trump Era financial industry regulators late last month launched proposed changes to the Volcker rule, a controversial provision of the Dodd-Frank Act restricting proprietary trading by banks and hemming in activities involving private equity and hedge funds.
After the Great Recession, the Volcker Rule was created by former Federal Reserve Chairman Paul A. Volcker who died at 92 last year, about nine weeks before the regulators acted.
To recap, the Volcker Rule “prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds,” according to the website Investopedia. “The Volcker Rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2008 financial crisis.”
Since it took effect in 2014, the Volcker Rule has been a lightning rod for critics and proponents. During the Trump Era, there has been a consistent push amend the rule.
On January 30, the Board of Governors of the Federal Reserve System, the CFTC, the Federal Deposit Insurance Corp., the Office of Comptroller of the Currency and the SEC — issued “a notice of proposed rulemaking” and began a public comment period.
The regulators are arguing that the “the rule has created compliance uncertainty and imposed limits on certain banking services and activities that the Volcker rule was not intended to restrict.” The regulators’ actions follow the unveiling of the “simplified requirements for the proprietary trading restrictions in November 2019.”
The proposed changes would:
- Revise “certain restrictions in the foreign public funds exclusion to more closely align the provision with the exclusion for similarly situated U.S. registered investment companies.”
- Allow “loan securitizations excluded from the rule to hold a small amount of non-loan assets, consistent with past industry practice, and codify existing staff-level guidance regarding this exclusion.”
- Revise the exclusion for “small business investment companies to account for the life cycle of those companies and would request comment on whether to clarify the scope of the exclusion for public welfare investments, including as it relates to rural business investment companies and qualified opportunity zone funds.”
- Change the “the preamble to the 2013 rule related to calculating a banking entity’s ownership interests in covered funds.” The regulators now acknowledge that the definition of what is a “covered fund” has been “expansive and … are now proposing several new exclusions from the covered fund provisions to address the potential over-breadth of the covered fund definition and related requirements.”
- Allow “an exclusion from the definition of covered fund for venture capital funds.”
- Feature “two new exclusions” that allow “traditional financial services via a fund structure, subject to certain safeguards;” the proposed rule would allow
- “an entity created and used to facilitate a customer’s exposures to a transaction, investment strategy, or other service;”
- Vehicles for integrated private wealth management services.
- Allow “a banking entity to engage in a limited set of covered transactions with a covered fund the banking entity sponsors or advises or with which the banking entity has certain other relationships.”
- Clarify “the definition of ownership interest” by allowing “a safe harbor for bona fide senior loans or senior debt instruments to make clear that an ‘ownership interest’ in a fund does not include such credit interests in the fund.” The regulators “would provide clarity about the types of credit rights that would be considered within the scope of the definition of ownership interest.”
- Simplify “compliance efforts by tailoring the calculation of a banking entity’s compliance with the implementing regulations’ aggregate fund limit and covered fund deduction, and provide clarity to banking entities regarding their permissible investments made alongside covered funds.”
There were swift reactions from key groups and individuals.
From the U.S. House of Representatives, Congresswoman Maxine Waters (D-CA), who is also chairwoman of the House Financial Services Committee, argued that the proposals weaken the Volcker Rule.
“The Volcker Rule is a cornerstone of Wall Street reform … In August, regulators senselessly weakened the proprietary trading section of this critical rule. Today, they are proposing to allow banks to invest in the same risky assets that contributed heavily to the financial crisis and to become more entangled in private equity and hedge funds,” Waters says in a prepared statement.
The president and CEO of the securities industry association SIFMA Kenneth E. Bentsen, Jr., reports that his group is reviewing the situation and will file a comment with the regulators.
“The current definition of ‘covered fund’ remains significantly overbroad and unduly complex, and the exclusions from the definition are excessively narrow and difficult to implement,” Bentsen says. “This unnecessarily restricts the ability of banking entities to facilitate capital formation … [and] to provide asset management services, customer facilitation services and long-term debt and equity financing to U.S. businesses indirectly through fund structures, even though they are expressly permitted to do so directly.”
The regulators will accept comments until April 1 of this year.
The full, 243-page proposal can be found here: http://bit.ly/37j3sMZ
It will be interesting to see if these changes quietly lead to a modified Volcker Rule or will ignite renewed interest. With so many other issues to grapple with, though, does Washington care enough to revive the great debate over the Volcker Rule?