On Tuesday, Oct. 11, 2011 at 10 a.m. EST, the board of directors of the Federal Deposit Insurance Corp. (“FDIC”) will hold a public meeting to discuss the implementation of the Volcker Rule.
The rule is part of the Dodd-Frank Act and restricts the proprietary trading and private investment fund activities of U.S. banks and bank affiliates, as well as foreign banks with banking operations in the United States (collectively, “banking entities”). The rule regulates the sponsorship of private equity or hedge funds by banking entities, and generally prohibits them from engaging in proprietary trading or investing in hedge and private equity funds. The rule contains limited exceptions for (1) transactions involving U.S. government, agency and GSE securities, (2) underwriting or market-making activity, (3) risk-mitigation and hedging activity, (4) transactions done on behalf of clients, and (5) “de minimis” holdings of sponsored investment funds. However, from the statutory language, it is unclear how broadly these exceptions will be applied. While the federal regulators have not yet published a proposed version of the regulation that would implement the Volcker Rule, various news outlets have released what purports to be a confidential internal draft of the regulation dated Sept. 30, 2011. According to this version, proprietary trading would be defined in a broad manner, buoyed by a three-step approach that would allow regulators to classify impermissible proprietary trades and positions. Further, the plan would severely limit instances where a banking entity could hold an “ownership interest” in hedge and private equity funds. The plan would also require banking entities who may be affected by the rule to install internal controls and monitors that would assist with compliance with the rule’s prohibitions and restrictions.
Under the Dodd-Frank Act, implementation of the Volcker Rule will be a joint effort of the Commodity Futures Trading Commission, the FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Securities and Exchange Commission. Under the Act, an implementing regulation was to be promulgated by Oct. 21, 2011. Now, however, it is highly unlikely that a final regulation will be in place by then. Once the regulation is finalized, banking entities will have until July 21, 2014 to conform their activities, with the Federal Reserve Board empowered to grant a banking entity up to three one-year extensions (with an additional five-year extension potentially available for investments in illiquid funds).
For more information on the FDIC meeting agenda and a link to watch live streaming video of the meeting, visit http://www.fdic.gov/news/board/notice11oct2011.html.
If you have any questions concerning this Alert, please contact your attorney at Schulte Roth & Zabel or Joseph P. Vitale | +1 212.756.2485.
This information has been prepared by Schulte Roth & Zabel LLP (“SRZ”) for general informational purposes only. It does not constitute legal advice, and is presented without any representation or warranty as to its accuracy, completeness or timeliness. Transmission or receipt of this information does not create an attorney-client relationship with SRZ. Electronic mail or other communications with SRZ cannot be guaranteed to be confidential and will not (without SRZ agreement) create an attorney-client relationship with SRZ. Parties seeking advice should consult with legal counsel familiar with their particular circumstances. The contents of these materials may constitute attorney advertising under the regulations of various jurisdictions.