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From Banking and Finance Law Daily, June 10, 2014

SEC staff responds to FAQs on its rule implementing the Volcker Rule

By Amy Leisinger, J.D.

The SEC staff has issued responses to frequently asked questions to provide guidance on the Commission’s final rule, adopted in coordination with other federal financial regulators, implementing the “Volcker Rule.” Section 619 of the Dodd Frank Act added new Section 13 to the Bank Holding Company Act to generally prohibit banking entities (insured depository institutions or their controlling companies and any companies treated as bank holding companies, as well as any affiliate or subsidiary of these entities) from engaging in proprietary trading and from retaining an ownership interest in a hedge fund or private equity fund. The Commission staff’s guidance elaborates on applicable definitions and exemptions and is designed to assist entities in maintaining compliance with recordkeeping and reporting obligations.

Quantitative measurements. In its guidance, the staff reiterates that measurement and recording of required metrics on a daily basis pursuant to the rule must begin July 1, 2014, and that the daily metrics recorded during July must be reported to the Commission by September 2, 2014. The final rule requires a banking entity at or above the $50-billion threshold to report metrics data for each calendar month within 30 days of the end of the month (unless the deadline occurs on a Saturday, Sunday, or federal holiday). Certain required metrics have a calculation period of 30 days, 60 days, or 90 days, and, beginning with the report due October 30, 2014, metrics reports must include data for all applicable calculation periods, according to the staff.

Beginning with information for January 2015, the final rule requires reporting within 10 days of the end of each calendar month unless the Commission provides the banking entity with notice to report on a different basis, the staff states.

Trading desks. In addressing a question regarding the breadth of the term “trading desk” and related reporting obligations, the staff notes that the final rule defines the term to mean the smallest unit of organization of a banking entity that transacts in financial instruments for the account of a banking entity or an affiliate. Further, the staff clarifies, the agencies expect that a “trading desk” reflects the level at which the profit and loss is attributed and promotes accountability at the level where the trading activity occurs. Trades and positions managed by the desk may be booked in different affiliated entities, but, the staff cautions, if this is the case, the trading desk must have records identifying all positions and the legal entities in which the positions are held.

If a trading desk spans multiple legal entities, it must report quantitative measurements to each of the agencies with jurisdiction over any of the entities, but the quantitative measurements should be calculated at the level of the entire desk and need not be performed separately for each subset of positions. This same set of “desk-wide measurements” should be reported to each agency with authority over any of the entities that compose the trading desk, the staff explains.

Conformance period. A banking entity must conform all of its proprietary-trading and covered-fund activities to the requirements of Section 13 and the final rule by July 21, 2015. According to the staff, during the conformance period, a banking entity is expected to make a good-faith effort to conform its activities and investments to the new requirements, including evaluating its present approaches and developing and implementing an appropriate conformance plan. Banking entities with stand-alone proprietary trading operations are expected to terminate them, and all banking entities should refrain from expanding such activities and making new investments subject to the rule, the staff explains.

“Covered fund” exclusions. The exclusion from the definition of “covered fund” for loan securitizations provides that a loan securitization may hold assets designed to assure servicing or timely distribution of proceeds to holders. In its guidance, the staff clarifies that servicing assets may be any type of asset but must qualify as “permitted securities” under the final rule. This includes cash equivalents, high-quality, highly liquid, short-term investments, and securities received in lieu of previously contracted debts, the staff explains.

The final rule also explicitly excludes from the definition of “covered fund” an issuer that is registered as an investment company or that is a foreign public fund organized and governed outside of the U.S. However, the staff observes, although the final rule excludes an entity that is seeded to become a registered investment company pursuant to a written plan, it does not address an issuer planning to eventually become a foreign public fund. Nevertheless, the staff assures, the agencies believe it appropriate that an entity that will become an excluded foreign public fund be treated the same as an investment company under the rule.

Names of covered funds and banking entities. Although a banking entity may organize and offer a covered fund under the final rule, the covered fund may not share the same name or a variation of the same name as the banking entity or any of its affiliates and may not use the word “bank” in its name. According to the staff, this means that the name of a fund must be sufficiently distinct so as to not lead to confusion regarding the relationship between the banking entity and the fund. As an example, the staff states that a name featuring the same root word, initials, or other corporate symbol would be unacceptable. Marketing and promotional materials also must not contain statements that would lead investors to believe that that the banking entity or its affiliates insure the obligations or performance of the covered fund, the staff explains.

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