SAF Submit Comments on Proprietary Trading Proposed Rule

In January, the leaders of the several financial regulators – the Federal Reserve, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the Commodity Futures Trading Commission – announced their intent to amend sections of the Volcker Rule, a provision in Dodd-Frank that limited financial institution’s ability to conduct certain investment activities.

The Volcker Rule prohibited banks from the ability to invest on behalf of their clients and increase revenue from the overall market gain, rather than earning commissions from buying or selling assets, known as proprietary trading. The Rule also barred banks or federally insured deposit institutions from acquiring any ownership in hedge fund or private equity institutions. Although Dodd-Frank was signed into law in 2010, the rule did not go into effect until 2013, highlighting the difficulty of drafting a rule that satisfies five regulator’s jurisdictions and priorities.

In May 2018, President Trumped signed into law S. 2155, which rolled back some burdens created by Dodd-Frank and created pro-growth policies tailored predominately toward small-to-medium sized institutions. Shortly after, all five regulators voted to exempt banks with less than $10 billion in assets from Volcker Rule compliance and requirements, following S. 2155’s mandate.

In July 2018, the regulators published a proposed rule to implement the proposed changes from S. 2155 and provide additional clarity for banks about the $10 billion threshold as to what types of trading and investments are permitted and what are not. The proposed rule has had several revisions and comment periods extended during 2019. The regulators are expected to finalize the rule this year with a compliance date of July 2021.

The amended Volcker Rule will:

  • Streamline the definition of “covered funds” to ease compliance burdens and costs
  • Right-size the regulation, which has been applied too broadly to include funds that were never intended to be brought within the rule’s jurisdiction
  • Exclude credit funds, venture capital funds, family wealth management vehicles, and customer facilitation funds from the definition
  • Codify an exclusion for qualifying foreign funds – codifying a common industry practice and cutting compliance costs
  • Promote capital formation for small businesses pursuing funding from venture capital funds

The amendments to the Volcker Rule will enhance capital formation and reduce the regulatory burden some banks have had in place for almost a decade.

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