Proprietary Trading and Certain Interests in and Relationships With Covered Funds (Volcker Rule); Request for Public Input

AGENCY:

Office of the Comptroller of the Currency (OCC), Treasury.

ACTION:

Request for information.

SUMMARY:

The OCC is seeking the public's input with this request for information to assist in determining how the final rule implementing section 13 of the Bank Holding Company Act (commonly referred to as the “Volcker Rule”) should be revised to better accomplish the purposes of the statute. The OCC also solicits comments suggesting improvements in the ways in which the final rule has been applied and administered to date. This OCC request is limited to regulatory actions that may be undertaken to achieve these objectives. The OCC is not requesting comment on changes to the underlying Volcker statute. The OCC recognizes that any revision to the final rule or the administration of that rule must be done consistent with the constraints of the statute and requests that commenters provide input that fits within the contours of that structure.

DATES:

Comments should be submitted by September 21, 2017.

ADDRESSES:

You may submit comments to the OCC by any of the methods set forth below. Because paper mail in the Washington, DC area and at the OCC is subject to delay, commenters are encouraged to submit comments through the Federal eRulemaking Portal or email, if possible. Please use the title “Volcker Rule; Request for Information” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

• Federal eRulemaking Portal—“Regulations.gov”: Go to www.regulations.gov. Enter “Docket ID OCC-2017-0014” in the Search Box and click “Search.” Click on “Comment Now” to submit public comments.
• Click on the “Help” tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting public comments.
• Email: regs.comments@occ.treas.gov.
• Mail: Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency, 400 7th Street SW., Suite 3E-218, Washington, DC 20219.
• Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, Washington, DC 20219.
• Fax: (571) 465-4326.

Instructions: You must include “OCC” as the agency name and “Docket ID OCC-2017-0014” in your comment. In general, the OCC will enter all comments received into the docket and publish them on the Regulations.gov Web site without change, including any business or personal information that you provide such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this request for information by any of the following methods:

• Viewing Comments Electronically: Go to www.regulations.gov. Enter “Docket ID OCC-2017-0014” in the Search box and click “Search.” Click on “Open Docket Folder” on the right side of the screen. Comments and supporting materials can be filtered by clicking on “View all documents and comments in this docket” and then using the filtering tools on the left side of the screen.
• Click on the “Help” tab on the Regulations.gov home page to get information on using Regulations.gov. The docket may be viewed after the close of the comment period in the same manner as during the comment period.
• Viewing Comments Personally: You may personally inspect and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 649-6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-5597. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect and photocopy comments.

FOR FURTHER INFORMATION CONTACT:

Ted Dowd, Director; Suzette Greco, Assistant Director; Tabitha Edgens, Senior Attorney; Mark O'Horo, Attorney, Securities and Corporate Practices Division, (202) 649-5510; Patrick Tierney, Assistant Director, Legislative and Regulatory Activities Division, (202) 649-5490, 400 7th Street SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION:

The OCC gives notice that it is seeking the public's input to assist in determining how the final rule implementing section 13 of the Bank Holding Company Act (the “final rule”) should be revised to better accomplish the purposes of the statute. The OCC also solicits comments suggesting improvements in the ways the final rule has been applied and administered to date. The request for information published here also is available on the OCC's Web site.

As this request for information describes, there is broad recognition that the final rule should be improved both in design and in application. A report recently issued by the Department of the Treasury (“Treasury Report”) identifies problems with the design of the final rule—the inclusion of a “purpose” test for defining proprietary trading, for example. The report also contains recommendations for revisions to the final rule. The OCC's objective in issuing this request for information is to gather additional, more specific information that could provide focused support for any reconsideration of the final rule that the rulewriting agencies may undertake and contribute to the development of the bases for particular changes that may be proposed.

The information that the OCC is soliciting could support the revisions to the final rule advanced in the Treasury Report and elsewhere; it also may support additional revisions that are consistent with the spirit of the Treasury Report. In any case, the OCC and the other Volcker rulewriting agencies will need to explain the basis for any changes to the current rule that may be proposed. The OCC recognizes that revisions to the current rule must be undertaken jointly by the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation and in consultation and coordination with the Securities and Exchange Commission and the Commodity Futures Trading Commission. The OCC anticipates that the information solicited here—that is, information and data describing with specificity any burdens or inefficiencies resulting from the current rule and explaining how particular revisions would alleviate those burdens or inefficiencies—would be useful to inform the drafting of a proposed rule.

Seeking Public Input on the Volcker Rule

I. Background

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) created a new section 13 of the Bank Holding Company Act (“BHC Act”), which generally prohibits “banking entities” (e.g., insured depository institutions, companies that control an insured depository institution, and their affiliates and subsidiaries) from engaging in proprietary trading and from holding an ownership interest in, sponsoring, or having certain relationships with hedge fund and private equity funds. Section 13 of the BHC Act authorized the Office of the Comptroller of the Currency (“OCC”), Board of Governors of the Federal Reserve System (the “Board”), Federal Deposit Insurance Corporation (“FDIC”), Commodity Futures Trading Commission (“CFTC”), and Securities and Exchange Commission (“SEC”) (together, the “Agencies”) to issue implementing regulations. The Agencies issued final regulations implementing section 13 in December 2013, with an effective date of April 1, 2014. Banking entities were generally required to conform their proprietary trading activities and investments to the requirements of section 13 and the final rule (together, the “Volcker Rule”) by July 21, 2015.

The final rule's proprietary trading provisions generally prohibit banking entities from engaging, as principal, in short-term trading of certain securities, derivatives, commodity futures and options on these instruments. The final rule's covered funds provisions generally prohibit banking entities from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (“covered fund”). The final rule defines the term covered fund to include any issuer that would be an investment company under the Investment Company Act of 1940 if it were not otherwise excluded by sections 3(c)(1) or 3(c)(7) of that Act, as well as certain foreign funds and commodity pools. The proprietary trading prohibition and the covered funds prohibition are subject to a number of exclusions and exemptions. Banking entities of all sizes are subject to the Volcker Rule and are generally required to establish an internal compliance program reasonably designed to ensure and monitor compliance with the Volcker Rule.

The Volcker Rule was intended to promote the safety and soundness of banking entities and prevent taxpayer bailouts by minimizing bank exposure to certain proprietary trading and fund activities that could involve undue risk. At the same time, the Volcker Rule was designed to permit banking entities to continue providing client-oriented financial services that are critical to capital generation and that facilitate liquid markets. Some have asserted that the Volcker Rule has succeeded in accomplishing these goals in some respects. However, others have identified difficulties in interpreting and applying some of the final rule's provisions. Many have argued that the final rule is overly complex and vague. Banking entities in particular have suggested that, despite their best efforts, they sometimes are not able to distinguish permissible from prohibited activities. Banking entities also have suggested that the Volcker Rule is overbroad and restricts a number of essential financial functions, potentially restricting activities that could spur economic growth. In particular, firms have suggested that they have been forced to curtail economically useful market-making, hedging, and asset-liability management to avoid violating the proprietary trading prohibition. The covered funds prohibition has also been criticized for capturing investment vehicles that facilitate lending activity and capital formation, even though they may not be equivalent to traditional private equity funds or hedge funds.

The OCC is seeking the public's input on whether aspects of the final rule and its implementation should be revised to better accomplish the purposes of section 13 of the BHC Act while decreasing the compliance burden on banking entities and fostering economic growth. In particular, the OCC is inviting input on ways to tailor further the rule's requirements and clarify key provisions that define prohibited and permissible activities. The OCC is also inviting input on how the existing rule could be implemented more effectively without revising the regulation. The OCC encourages the public to submit data addressing the effectiveness of the rule and its implementation, the current compliance burden, and any need for additional guidance and/or proposed revisions to the rule.

The OCC recognizes that any revisions to the final rule would need to be undertaken together with the other Agencies. Revisions would require the Agencies to articulate a reasoned basis for the changes, so it is especially important for those commenting to provide evidence demonstrating the nature and scope of the problems they identify and the likely efficacy of any solutions they propose. The OCC believes the information gathered in response to this request for information would be helpful in that regard.

This request for information identifies four broad areas for the public's consideration: (1) The scope of entities to which the final rule applies; (2) the proprietary trading restrictions; (3) the covered fund restrictions; and (4) the compliance program and metrics reporting requirements. However, the OCC is inviting comments on all aspects of the final rule and its administration. The request for information is limited to regulatory actions that may be undertaken to better accomplish the purpose of the statute and improve the way the final rule has been applied and administered to date. The OCC is not requesting comment on changes to the underlying Volcker statute. Regulatory actions that may be undertaken to achieve these objectives will be subject to the constraints of the statute. For instance, activity the Agencies may permit under the market-making or risk mitigating hedging exceptions to the general proprietary trading prohibition are subject to statutory safety and soundness and financial stability backstops, as well as other conditions.

II. Topics and Questions

The OCC is particularly interested in receiving comments and supporting data on the following topics and questions:

Scope of Entities Subject to the Rule

The Volcker Rule's statutory prohibition applies to any “banking entity,” a term that is defined to include any insured depository institution, any company that controls an insured depository institution, or that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978, and any affiliate or subsidiary of such entity. The Agencies adopted this definition in the final rule and provided a limited number of specific exclusions.

As a result of this definition, the Volcker Rule prohibitions and compliance program requirements apply to many entities that may not pose systemic risk concerns, such as small community banks engaged primarily in traditional banking activities and other banks that do not engage in the type of activities, or in activities that present the type of risk, that the Volcker Rule was designed to restrict. For example, banks with minimal or no proprietary trading activities are subject to the final rule. Many of these institutions have reported experiencing a significant regulatory burden. The final rule's tailored compliance program requirements were intended to reduce the Volcker Rule's economic impact on small banking entities, but even determining whether an entity is eligible for the simplified program can pose a significant burden for small banks. In addition, certain activities of small banks have been caught up in the proprietary trading prohibition. Exempting small banking entities and other banking entities without substantial trading activities would enable them to reduce their compliance costs and devote more resources to local lending without materially increasing risk to the financial system.

The banking entity definition also extends to foreign subsidiaries of foreign banking organizations acting outside of the United States. In particular, foreign banking organizations have raised questions regarding non-U.S. entities that are not covered funds under section 10(b)(iii) of the final rule (“foreign excluded funds”) and whether such funds may become banking entities if they are “controlled” by a banking entity. Foreign banking entities that sponsor foreign non-covered funds in some foreign jurisdictions may, by virtue of typical corporate governance structures for funds in these jurisdictions, be deemed to “control” a foreign non-covered fund for purposes of the BHC Act. These corporate governance structures have raised questions regarding whether foreign non-covered funds that are sponsored by foreign banking entities and offered solely outside the U.S. and in accordance with foreign laws are banking entities under the final rule. The OCC, Board, and FDIC, in consultation with the SEC and CFTC, issued a statement of policy on July 21, 2017, announcing that the three Federal banking agencies are coordinating review of the treatment of these funds under the final rule and providing that they would not propose to take action with respect to such foreign funds during the one-year period prior to July 21, 2018, if they meet the criteria specified in the statement of policy.

Questions on Scope of Entities Subject to the Rule

1. What evidence is there that the scope of the final rule is too broad?

2. How could the final rule be revised to appropriately narrow its scope of application and reduce any unnecessary compliance burden? What criteria could be used to determine the types of entities or activities that should be excluded? Please provide supporting data or other appropriate information.

3. How would an exemption for the activities of these banking entities be consistent with the purposes of the Volcker Rule and not compromise safety and soundness and financial stability? Please include supporting data or other appropriate information.

4. How could the rule provide a carve-out from the banking entity definition for certain controlled foreign excluded funds? How could the rule be tailored further to focus on activities with a U.S. nexus?

5. Are there other issues related to the scope of the final rule's application that could be addressed by regulatory action?

Proprietary Trading Prohibition

The final rule, like the statute, defines proprietary trading as engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments. Building upon the statutory definition, the final rule adopted a three pronged definition of “trading account.” The first prong includes within the definition any account used by a banking entity to purchase or sell one or more financial instruments principally for the purpose of (a) short-term resale, (b) benefitting from short-term price movements, (c) realizing short-term arbitrage profits or (d) hedging any of the foregoing. Banking entities and commentators have asserted that this prong of the definition imposes a significant compliance burden because it requires determining the intent associated with each trade.

In addition, the final rule provides that the purchase or sale of a financial instrument will be presumed to be for the trading account under the first prong of the trading account definition if the banking entity holds the financial instrument for fewer than 60 days or substantially transfers the risk of the position within 60 days. If a banking entity sells or transfers the risk of a position within 60 days, it must be able to demonstrate that it did not purchase or sell the instrument for short-term trading purposes. Some banking entities have said that many transactions are presumed to be proprietary trading as a result of this provision, including transactions that were not the intended target of the proprietary trading restriction.

The Volcker statute and the final rule provide several exclusions and exemptions from the proprietary trading prohibition. However, banking entities have reported that complying with these exclusions and exemptions is unduly burdensome and the final rule's requirements may result in banking entities underutilizing them. In particular, industry groups, members of Congress, and others have argued that the rule does not provide sufficient latitude for banking entities to engage in market-making, which they have argued may have a negative impact on some measures of market liquidity.

Questions on the Proprietary Trading Prohibition

1. What evidence is there that the proprietary trading prohibition has been effective or ineffective in limiting banking entities' risk-taking and reducing the likelihood of taxpayer bailouts? What evidence is there that the proprietary trading prohibition does or does not have a negative impact on market liquidity?

2. What type of objective factors could be used to define proprietary trading?

3. Should the rebuttable presumption provision be revised, whether by elimination, narrowing, or introduction of a reverse presumption that presumes activities are not proprietary trading? Are there activities for which rebuttal should not be available? Should rebuttal be available for specified categories of activity? Could the rebuttable presumption provision be implemented in a way that decreases the compliance burden for banking entities?

4. What additional activities, if any, should be permitted under the proprietary trading provisions? Please provide a description of the activity and discuss why it would be appropriate to permit the activity, including supporting data or other appropriate information.

5. How could the existing exclusions and exemptions from the proprietary trading prohibition—including the requirements for permissible market-making and risk mitigating hedging activities—be streamlined and simplified? For example, does the distinction between “market-maker inventory” and “financial exposure” help ensure that trading desks using the market-making exemption are providing liquidity or otherwise functioning as market makers?

6. How could additional guidance or adjusted implementation of the existing proprietary trading provisions help to distinguish more clearly between permissible and impermissible activities?

7. Are there any other issues related to the proprietary trading prohibition that should be addressed by regulatory action?

Covered Funds Prohibition

Section 13 of the BHC Act generally prohibits banking entities from acquiring or holding an ownership in or sponsoring any private equity fund or hedge fund. Section 13 defines a hedge fund or private equity fund as an issuer that would be an investment company, as defined in the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that Act, or such similar funds as the Agencies may, by rule, determine. The Agencies adopted the definition referencing sections 3(c)(1) and 3(c)(7) of the Investment Company Act in the final rule and also included certain commodity pools and foreign funds in the covered fund definition. Recognizing that this definition may apply more broadly than necessary to achieve the Volcker Rule's purposes, the Agencies excluded several categories of issuers from the definition of covered fund in the final rule and established requirements for certain permitted covered fund activities, such as organizing and offering a covered fund, market making in covered fund interests, and covered fund activities and investments outside of the United States. Some have suggested that, notwithstanding the exclusions currently provided, the statutory definition referencing sections 3(c)(1) and 3(c)(7) of the Investment Company Act continues to include within its scope many issuers that were not intended to be covered by section 13.

The final rule also implements section 13's restrictions on relationships with hedge funds and private equity funds. The so-called “Super 23A” provision prohibits a banking entity that serves as investment manager, adviser, or sponsor to a covered fund from entering into a transaction with the covered fund (or any other covered fund controlled by the covered fund) if the transaction would be a covered transaction as defined in section 23A of the Federal Reserve Act.

Questions on the Covered Funds Prohibition

1. What evidence is there that the final rule has been effective or ineffective in limiting banking entity exposure to private equity funds and hedge funds? What evidence is there that the covered fund definition is too broad in practice?

2. Would replacing the current covered fund definition that references sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 with a definition that references characteristics of the fund, such as investment strategy, fee structure, etc., reduce the compliance burden associated with the covered fund provisions? If so, what specific characteristics could be used to narrow the covered fund definition? Does data or other appropriate information support the use of a characteristics-based approach to fund investments?

3. What types of additional activities and investments, if any, should be permitted or excluded under the covered funds provisions? Please provide a description of the activity or investment and discuss why it would be appropriate to permit the activity or investment, including supporting data or other appropriate information.

4. Is section 14 of the final rule (the “Super 23A” provision) effective at limiting bank exposure to covered funds? Are there additional categories of transactions and relationships that should be permitted under this section?

5. How could additional guidance or adjusted implementation of the existing covered fund provisions help to distinguish more clearly between permissible and impermissible activities? For example, should the final rule be revised to clarify how the definition of “ownership interest” applies to securitizations?

6. Are there any other issues related to the covered funds prohibition that could be addressed by regulatory action?

Compliance Program and Metrics Reporting Requirements

The final rule adopted a tiered compliance program requirement based on the size, complexity, and type of activity conducted by each banking entity. Banking entities that do not engage in activities covered by the final rule other than trading in government obligations are not required to establish a compliance program unless they become engaged in covered activities. Banking entities with assets of $10 billion or less are eligible for a simplified compliance program. Nonetheless, banking entities have reported that the compliance program requirements in the final rule present a compliance burden, especially for small institutions that are not engaged in significant levels of proprietary trading and covered fund activities. Section 20 and Appendix A of the final rule require certain of the largest banking entities engaged in significant trading activities to collect, evaluate, and furnish data regarding covered trading activities as an indicator of areas meriting additional attention by the banking entity and relevant Agency.

Questions on the Compliance Program, Metrics Reporting Requirements, and Additional Issues

1. What evidence is there that the compliance program and metrics reporting requirements have facilitated banking entity compliance with the substantive provisions of the Volcker Rule? What evidence is there that the compliance program and metrics reporting requirements present a disproportionate or undue burden on banking entities?

2. How could the final rule be revised to reduce burden associated with the compliance program and reporting requirements? Responses should include supporting data or other appropriate information.

3. Are there categories of entities for which compliance program requirements should be reduced or eliminated? If so, please describe and include supporting data or other appropriate information.

4. How effective are the quantitative measurements currently required by the final rule? Are any of the measurements unnecessary to evaluate Volcker Rule compliance? Are there other measurements that would be more useful in evaluating Volcker Rule compliance?

5. How could additional guidance or adjusted implementation of the existing compliance program and metrics reporting provisions reduce the compliance burden? For example, should the rule permit banking entities to self-define their trading desks, subject to supervisory approval, so that banking entities report metrics on the most meaningful units of organization?

6. How could the final rule be revised to enable banking entities to incorporate technology-based systems when fulfilling their compliance obligations under the Volcker Rule? Could banking entities implement technology-based compliance systems that allow banking entities and regulators to more objectively evaluate compliance with the final rule? What are the advantages and disadvantages of using technology-based compliance systems when establishing and maintaining reasonably designed compliance programs?

7. What additional changes could be made to any other aspect of the final rule to provide additional clarity, remove unnecessary burden, or address any other issues?