In the weeks following the 2016 Presidential election, members of the incoming Administration clearly expressed their views that certain aspects of Dodd-Frank, including the Volcker Rule, are overly complex. Specifically, then-Treasury Secretary-nominee Steven Mnuchin argued that the “number one problem with the Volcker Rule is that it’s too complicated and people don’t know how to interpret it.”1
On June 12, 2017, the Treasury Department took a significant step on financial regulatory issues by releasing its first report pursuant to President Trump’s executive order setting forth “Core Principles” for regulating the US financial system. Among other things, the report argues that the Volcker Rule requires “substantial amendment” and that its implementation has “hindered market-making functions necessary to ensure a healthy level of market liquidity.”2 Accordingly, the report proposes several changes—some of which could be implemented by the regulatory agencies and some of which would require Congressional action to amend the underlying statute—designed to “reduce the scope and complexity” of the rule.3
On August 2, 2017, the Office of the Comptroller of the Currency (OCC) issued a notice and request for comment4 on whether certain aspects of the regulation implementing the Volcker Rule should be revised to “better accomplish the purposes of the statute” while decreasing the compliance burden on banking entities and fostering economic growth.
Specifically, the OCC seeks feedback on:
Noting that a “bipartisan consensus has emerged that the Volcker Rule needs clarification and recalibration,” Acting Comptroller of the Currency Keith Noreika noted that he looks forward to issuing a proposed rule “soon” in conjunction with the FRB, FDIC, SEC, and CFTC.5
Specific areas of interest
Although the OCC welcomes comments on all aspects of the Volcker Rule, it specifically seeks feedback on 25 questions across the four broad areas described below.
Notably, the OCC is not seeking feedback on changes to the statute itself.
Scope of entities subject to the rule
The notice observes that, because the Volcker Rule’s statutory prohibition applies to any “banking entity,” the implementing regulation covers 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 types of activities . . . that the Volcker Rule was designed to restrict.”6
Accordingly, the notice asks how the rule can be revised to “appropriately narrow its scope of application and reduce any unnecessary compliance burden” without compromising safety and soundness, and requests supporting data in conjunction with feedback on this question.
The notice also asks how the agencies could provide a “carve-out” from the banking entity definition for certain controlled foreign excluded funds.
Proprietary trading restrictions
Noting that the final rule adopted a three-pronged definition of “trading account,” which some commentators argue imposes a “significant compliance burden” because the first prong requires determining the intent associated with each trade,7 the OCC asks what type of objective factors could be used to define proprietary trading.
In addition, the OCC asks whether the rebuttable presumption provision (i.e., that the purchase or sale of a financial instrument will be presumed to be for the trading account under the first prong of the definition if the banking entity holds the instrument for fewer than 60 days or substantially transfers the position’s risk within 60 days) should be revised and, if so, how it should be revised.
Covered fund restrictions
Acknowledging that the adopted covered fund definition “may apply more broadly than necessary” to achieve the Volcker Rule’s purposes,8 the OCC sets forth several questions about possibly replacing the definition or issuing additional guidance on issues related to covered funds.
The notice also asks whether the so-called “Super 23A” provision is effective at limiting bank exposure to covered funds.
Compliance program and metrics reporting requirements
Recognizing the burdens associated with compliance program and metrics reporting requirements, the OCC asks how the rule could be revised to reduce such burdens.
Among other things, the OCC asks how the agencies can enable banking entities to “incorporate technology-based systems when fulfilling their compliance obligations” under the rule.9
Comments on the notice are due 45 days after its publication in the Federal Register. Banks should carefully analyze the notice and consider submitting comments, either individually or through industry trade associations, as appropriate.
As further developments occur, including a formal proposal to amend the Volcker Rule, Deloitte will issue additional updates as appropriate.
1CNBC, “Treasury secretary nominee Steve Mnuchin: Dodd-Frank is way too complicated,” (November 30, 2016), available at https://www.cnbc.com/video/2016/11/30/treasury-secretary-nominee-steve-mnuchin-dodd-frank-is-way-too-complicated.html.
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