The Board of Governors of the Federal Reserve System ("Federal Reserve"), the Federal Deposit Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency ("OCC"), the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC") (collectively, the "Agencies") have approved the release of a notice of proposed rulemaking ("Proposal") that, if adopted as a final regulation, would significantly revise the Volcker Rule.1

Subject to the statutory requirements, the Agencies are seeking to clarify the requirements of the Volcker Rule in order to (i) adopt a more risk-based approach, (ii) make the implementation of the regulation more efficient and less burdensome by reducing its complexity and (iii) make changes based on the experience of the industry and the regulators with the current regulations (including addressing matters from the staffs' Frequently Asked Questions ("FAQs")). While the proposed revisions address many of the implementation and compliance issues raised by the current regulation, the Proposal also requests comment on other potential changes that the Agencies are considering. 2 The comment period on the Proposal will end 60 days after it is published in the Federal Register. We have summarized below the proposed revisions.

Tailored Compliance Requirements

The Proposal would seek to better tailor the application of the Volcker Rule to banking entities by creating categories of banking entities based on their levels of trading activity.

Specifically, banking entities would be divided into the following categories:

  • Entities with "significant trading assets and liabilities," meaning consolidated gross trading assets and liabilities of at least $10 billion (excluding obligations of or guaranteed by the United States or any agency of the United States)
  • Entities with "moderate trading assets and liabilities," meaning consolidated trading assets and liabilities of less than $10 billion, but greater than or equal to $1 billion
  • Entities with "limited trading assets and liabilities," meaning consolidated trading assets and liabilities of less than $1 billion

Non-US banking entities would determine if they have significant trading assets and liabilities by reference to the aggregate assets of their combined US operations but would use aggregate assets of their worldwide operations to determine if they have limited trading assets and liabilities. 3 Thus, non-US banking groups that do not trigger the definition of significant trading assets and liabilities would be included in the moderate category, unless they have less than $1 billion in trading assets and liabilities on a global basis.

Banking entities with significant trading assets and liabilities would be required to have a comprehensive six-pillar Volcker Rule compliance program similar to that required by the current regulation. Banking entities with moderate trading assets and liabilities would be subject to reduced compliance obligations tailored to their trading activities. Banking entities with limited trading assets and liabilities would be presumed to be in compliance with the Volcker Rule unless an Agency determined that they were engaged in a prohibited activity and overcame the presumption of compliance.

The Agencies also would have the authority to put a banking entity in a more stringent compliance category based on an individualized determination. In the Proposal, the Agencies state that approximately 40 top-tier banking entities would have sufficient trading assets and liabilities so as to be ineligible for a presumption of compliance, but do not identify the affected banks or the allocation between US and non-US banking groups. 4

While the stratification of banking entities would be based solely on the banking entity's trading assets and liabilities, the applicable level of compliance program obligations resulting from that trading measure would apply equally to covered fund activities. Thus, banking entities with "significant" trading operations would be subject to the most onerous compliance program requirements not only with respect to their trading activities, but also with respect to their covered fund activities. Likewise, banking entities with only "moderate" or "limited" trading activities would be eligible for reduced compliance obligations with respect to both their trading and covered fund activities.

The potential implications of the proposed stratification of banking entities into categories based on their trading assets and liabilities is discussed in more detail below under "Covered Funds."

Banking Entity Status of Controlled Funds

The Proposal does not include any proposed amendments that would affect the Agencies' current approach, established through a series of FAQs and no-action relief, with respect to the potential "banking entity" treatment of registered investment companies ("RICs"), foreign public funds ("FPFs") or "foreign excluded funds." Rather, the Proposal indicates that the Agencies will continue not to regard RICs and FPFs as banking entities, provided that the banking entity sponsor reduces its ownership interest to not more than 25 percent of any class of voting shares after a seeding period and conducts its investment advisory and other services in accordance with applicable law.

With respect to the potential banking entity status of foreign excluded funds, the Proposal preserves the status quo established by the Agencies' policy statement of July 21, 2017, which set out a no-action position pursuant to which "qualifying foreign excluded funds" established and operated as part of a bona fide asset management business would, in effect, not be characterized as banking entities pending further consideration of the issue by the Agencies. The Proposal includes an announcement that this no-action position will be extended for an additional year, until July 21, 2019, as the Agencies continue to consider the issue. The Proposal also requests further comment on how the Agencies should address foreign excluded funds, particularly in light of the proposed changes to the exemptions for proprietary trading that occurs solely outside of the United States ("TOTUS") and for covered fund activities solely outside the United States ("SOTUS") (as defined below) and whether the industry would find it helpful to have the option to treat foreign excluded funds as covered funds (since covered funds are exempt from the definition of banking entity).

Notably, the Proposal appears to address a recurring question among many industry participants regarding the permissible length of a RIC or FPF seeding period, which the Agencies in their July 2015 FAQ had stated "may take some time, for example, three years." In the Proposal, the Agencies characterize the reference to three years as being an "example" that was provided "without setting any maximum prescribed period for a RIC or FPF seeding period." On the other hand, Question 14 to the Proposal goes on to ask whether "commenters believe that there is uncertainty about the length of permissible seeding periods for RICs, FPFs, and SEC-regulated business development companies due to the Agencies' description of a seeding period ... without specifying a maximum period of time." Accordingly, this issue may still require further industry engagement during the comment process.


1 Federal Reserve Board asks for comment on proposed rule to simplify and tailor compliance requirements relating to the "Volcker rule" (May 30, 2018), available at The FDIC approved the release of the Proposal on May 31, 2018, at which time the Comptroller signaled that he had approved the release on behalf of the OCC. The CFTC approved the release on June 4, 2018, and the SEC met on June 5, 2018, to do the same. Agencies ask for public comment on proposal to simplify and tailor "Volcker rule" (June 5, 2018), available at

2 On May 24, 2018, certain amendments were adopted to the statutory Volcker Rule as part of the Crapo Act ("Economic Growth, Regulatory Relief, and Consumer Protection Act"). Please see our Legal Update on the Crapo Act at 2018/. The Agencies plan to issue amendments to the current regulation to implement these legislative amendments and state that they will not enforce the current regulation in a manner inconsistent with the amendments until such time as the Agencies have issued regulations implementing the amendments.

3 The Proposal requests feedback on whether the Agencies should further tailor the application of the Volcker Rule to banking entities that operate on a separate and independent basis from an affiliated banking group.

4 Vice Chairman Randal Quarles disclosed in the Federal Reserve's open meeting on May 30, 2018, that only 18 top- tier banking entities had significant trading assets and liabilities.

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