Financial regulators reveal Volcker Rule amendments
25 June 2020 Washington DC
Image: PHOTOCREO Michal Bednarek/shutterstock.com
Five federal regulatory agencies have modified the Volcker Rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds.
The three modified areas, effective on 1 October, include streamlining the covered funds portion of the rule; addressing the extraterritorial treatment of certain foreign funds; and permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was intended to address.
The Office of the Comptroller of the Currency, Treasury; the Board of Governors of
the Federal Reserve System; the Federal Deposit Insurance Corporation; the Securities
and Exchange Commission; and the Commodity Futures Trading Commission were all involved in the modifications of the Volcker Rule.
The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.
A statement from commissioner Hester Peirce and commissioner Elad Roisman, described the rulemaking as a “momentous undertaking”.
Peirce and Roisman explained that the regulations implementing the Volcker Rule, since their adoption in 2013, have needed amendments such as the ones being adopted now.
The statement said: “As originally formulated, the implementing regulations were overly broad; prohibited domestic banking entities from engaging in traditional banking activities that did not implicate the concerns underlying the rule and imposed disproportionate burdens on funds outside the US. Bank customers paid the price in the form of inhibited access to capital.”
“The amendments we are voting on [25 June] bring useful clarity and surgically correct the regulations’ deficiencies while staying true to the Volcker Rule’s original objectives and remaining consistent with its mandates.”
“The amendments, among other things, make it possible for banking entities to extend credit and provide other traditional banking services using a fund structure, facilitate venture capital activity, remove barriers to banking entity investments in rural and low-income communities, enable banking entities to provide traditional banking services to funds, clarify the parameters pursuant to which banking entities can invest alongside the funds they organise, and limit the extraterritorial reach of the rule.”
Peirce and Roisman highlighted that the changes are intended to ensure that banks can serve their customers efficiently and to facilitate the flow of credit to the places in the economy that need it most.
The statement also noted: “Not only are such corrections long overdue, but they could not be more timely, considering the hardship so many businesses now face because of the pandemic and government lockdown orders.”
It was also explained that the relief could have gone further as commenters supported the idea of excluding long-term investment vehicles from the definition of covered funds, in order to facilitate economic growth.
The commissioners stated: “While we understand the complexities of inter-agency rulemaking efforts, and the compromises they entail, we will continue to consider the treatment of long-term investment vehicles and remain open to hearing any additional suggestions for further improving the regulations implementing the Volcker Rule.”
“We hope that there will be future opportunities to consider additional amendments that will facilitate innovation and capital formation, particularly in underserved areas of the country”, the statement concluded.
The three modified areas, effective on 1 October, include streamlining the covered funds portion of the rule; addressing the extraterritorial treatment of certain foreign funds; and permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was intended to address.
The Office of the Comptroller of the Currency, Treasury; the Board of Governors of
the Federal Reserve System; the Federal Deposit Insurance Corporation; the Securities
and Exchange Commission; and the Commodity Futures Trading Commission were all involved in the modifications of the Volcker Rule.
The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.
A statement from commissioner Hester Peirce and commissioner Elad Roisman, described the rulemaking as a “momentous undertaking”.
Peirce and Roisman explained that the regulations implementing the Volcker Rule, since their adoption in 2013, have needed amendments such as the ones being adopted now.
The statement said: “As originally formulated, the implementing regulations were overly broad; prohibited domestic banking entities from engaging in traditional banking activities that did not implicate the concerns underlying the rule and imposed disproportionate burdens on funds outside the US. Bank customers paid the price in the form of inhibited access to capital.”
“The amendments we are voting on [25 June] bring useful clarity and surgically correct the regulations’ deficiencies while staying true to the Volcker Rule’s original objectives and remaining consistent with its mandates.”
“The amendments, among other things, make it possible for banking entities to extend credit and provide other traditional banking services using a fund structure, facilitate venture capital activity, remove barriers to banking entity investments in rural and low-income communities, enable banking entities to provide traditional banking services to funds, clarify the parameters pursuant to which banking entities can invest alongside the funds they organise, and limit the extraterritorial reach of the rule.”
Peirce and Roisman highlighted that the changes are intended to ensure that banks can serve their customers efficiently and to facilitate the flow of credit to the places in the economy that need it most.
The statement also noted: “Not only are such corrections long overdue, but they could not be more timely, considering the hardship so many businesses now face because of the pandemic and government lockdown orders.”
It was also explained that the relief could have gone further as commenters supported the idea of excluding long-term investment vehicles from the definition of covered funds, in order to facilitate economic growth.
The commissioners stated: “While we understand the complexities of inter-agency rulemaking efforts, and the compromises they entail, we will continue to consider the treatment of long-term investment vehicles and remain open to hearing any additional suggestions for further improving the regulations implementing the Volcker Rule.”
“We hope that there will be future opportunities to consider additional amendments that will facilitate innovation and capital formation, particularly in underserved areas of the country”, the statement concluded.
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