August 10, 2017

First Steps Toward Volcker Rule Reform: Comptroller of the Currency Requests Input Following Treasury Department Report on Financial Regulation


On August 1, 2017, the Office of the Comptroller of the Currency (OCC), issued an Advance Notice of Proposed Rulemaking (ANPR) that represents the first concrete step toward reform of the regulations that implement the "Volcker Rule," one of the most controversial provisions of the 2010 Dodd-Frank Act. The ANPR is a short document, but its brevity belies its significance. The ANPR does not merely request comments on the rules themselves, but solicits suggestions for "improvements in the ways in which the final rule has been applied and administered to date."1 Thus, the Comptroller appears to recognize difficulties in the practical application of the regulations to real-life situations, including enforcement and examination practices. Prior efforts to clarify Volcker Rule obligations have come in the form of Answers to Frequently Asked Questions (FAQs).2 However, the FAQs have left many important questions unresolved and at times have raised more questions than they have answered.

In addition, the ANPR follows a Report recently issued by the Department of the Treasury (Treasury Report) that concluded that "[i]n its design and implementation…the Volcker Rule has far overshot the mark."3 The Treasury Report made several recommendations for reforms, including (a) exempting all banking organizations with $10 billion or less in assets, (b) limiting the proprietary trading ban to banking organizations with the largest and most active trading profiles (i.e., those subject to the Market Risk Capital Rules of the Federal banking agencies), (c) permitting greater flexibility with respect to relationships with pooled investment funds, (d) simplifying and reducing compliance program requirements, and (e) improving coordination and consistency among the regulators charged with interpreting and enforcing the Volcker Rule.4 The OCC notes that comments gathered in response to its ANPR "could support the revisions…advanced in the Treasury Report and elsewhere," and "may support additional revisions that are consistent with the spirit of the Treasury Report."5

As the ANPR notes, any changes to the regulations or their application must be consistent with the language of the statute underlying the Volcker Rule, and must be coordinated among the five different agencies charged with its enforcement. While these constraints limit the potential for reform at this time, the OCC's willingness to issue the ANPR reflects a forwardthinking approach that will have a significant long-term impact on financial market participants. Banks, bank affiliates, non-US financial institutions, and others should be attentive to these developments and consider providing input to the OCC.


Section 13 of the Bank Holding Company Act (BHC Act) and its implementing regulations (collectively referred to as the Volcker Rule) prohibit "banking entities"6 from engaging in proprietary trading and from holding ownership interests in certain types of investment funds. Section 13 was added to the BHC Act as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It authorizes the OCC, the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Commodity Futures Trading Commission (CFTC), and the Securities and Exchange Commission (SEC) to adopt implementing regulations, which they did in December 2013.7

The statute and regulations have been subject to extensive criticism. Multiple observers have argued that the restrictions on proprietary trading have led to a decline in the liquidity and quality of capital markets.8 Others suggest that the restrictions on banking entities' relationships with certain types of investment funds apply to pooled vehicles that were not within the intended scope of the statute.9 The regulations are also very broad and complex, leading to uncertainty in application and a lack of a clear framework for conducting business.

The Comptroller's Request for Comments and Information

Although the ANPR solicits comments and information on all aspects of the Volcker Rule's implementing regulations, it specifically inquires as to the following matters.

A. The Scope of Entities Subject to the Rule

The Volcker Rule applies to any "banking entity." There is no exemption for small entities. Thus, the Rule's prohibitions and compliance program requirements apply to small banks and their affiliates even if they do not engage in the higher-risk trading or investment activities that prompted Congress to adopt the Volcker Rule. While the regulations allow smaller entities to adopt less extensive compliance structures, the process of determining the appropriate compliance program is itself an expensive and time consuming process.

The ANPR and a recent release by the federal banking agencies identify another troublesome implication of the broad "banking entity" definition.10 Under the implementing regulations, certain non-US public investment funds that are similar to US mutual funds are not deemed to be "covered funds" that implicate the restrictions on relationships with banking entities.11 On the other hand, in some non-US jurisdictions, it is customary for banking entities that sponsor such funds to select the majority of the fund's directors or trustees or themselves serve as trustees. Such a fund would be deemed to be under the control of the banking entity, causing the fund to be deemed a banking entity itself.12 To address this unintended situation, financial regulators recently issued a statement of policy announcing that they would not propose to take action with respect to such foreign funds until July 21, 2018 if they meet certain specified conditions.13 They also announced that they are conducting a coordinated review to determine whether this issue could be settled by changes to their respective regulations.14

B. Proprietary Trading

The statute and implementing regulations prohibit banking entities from engaging in "proprietary trading." However, one portion of the regulations' definition of "proprietary trading" requires regulators and banking personnel to determine whether a transaction was "principally for the purpose" of (a) short-term resale, (b) benefitting from short-term price movements, (c) realizing short term arbitrage profits or (d) hedging any of the foregoing.15 This provision of the regulations has led to considerable uncertainty in application, due to the difficulties of determining intent.

The regulations also create a presumption that a purchase or sale of a financial instrument is a proprietary trade if the entity holds the position for fewer than 60 days or substantially transfers the risk of the position within 60 days.16 Yet there is no presumption of compliance if a position is held for a longer period. Many financial institutions believe that the presumption has been applied by examiners to "transactions that were not the intended target of the proprietary trading restriction."17 Finally, although the implementing regulations include exceptions and exemptions from the prohibition for certain transactions, compliance with their terms is so burdensome that they appear to be underutilized. For instance, as noted above, the restrictions on the exception for market-making have been criticized as unnecessarily diminishing the quality and depth of capital markets.18

C. Covered Funds Prohibition

Under Section 13 of the BHC Act a banking entity may not hold an ownership in or sponsor any "private equity fund" or "hedge fund." It defines these types of funds as investment funds that are excluded from the definition of an investment company under Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940, or that are similar funds as identified by the regulators. The implementing regulations added certain commodity pools and certain types of foreign funds to the "covered fund" definition.19 They also provided certain exclusions from the definition, and allowed banking entities to engage in certain activities, such as organizing and offering a covered fund, or market-making in covered fund interests. The implementing regulations also address the so-called "Super 23A" provisions of Section 13, which prohibit a banking entity that serves as investment manager, adviser, or sponsor to a covered fund from entering into a transaction with the fund if the transaction would be a "covered transaction" as defined in Section 23A of the Federal Reserve Act.20

However, as the Treasury Report notes, the statutory and regulatory definitions still include many types of issuers that are not "hedge funds" or "private equity funds," as those terms are commonly used in financial markets, and therefore capture more types of entities than appears to have been originally intended.21 For example, the restrictions on securitizations and joint ventures—which by statute should arguably be exempt—are complex and limiting due to the way in which the implementing rules were written. This most likely is the result of defining hedge funds and private equity funds in terms of the exemptions from the Investment Company Act of 1940 that they most commonly use, which because of their breadth and frequent use creates difficulties when their scope must be pared back. Commenters have also suggested that the "Super 23A" provisions should be interpreted to permit transactions between banking entities and covered funds to be effected on market terms, or to utilize the statutory exemptions within Section 23A itself, rather than prohibiting them outright.22

D. Compliance Program and Metrics Reporting

The implementing regulations establish a four-tier compliance regime that imposes progressively greater standards depending on the size and activities of a banking entity. Although some banking entities (those that have no covered fund or proprietary trading activities other than trading in government obligations) do not have to establish a compliance program, the review necessary to make that conclusion is a time consuming effort that requires resources that are often out of proportion to those of a smaller bank. Banking entities of all sizes have also found that the general compliance program and reporting requirements are complex and highly burdensome. Nevertheless, they are a key component of the Volcker Rule's implementation: the FRB recently imposed a $19 million civil monetary penalty against a firm that self-reported weaknesses in its Volcker Rule compliance program for proprietary trading, without reference to the occurrence of forbidden proprietary trading.23

Data and Viewpoints Requested

The Treasury Report identified several reforms that could be effected by changes to agency rules, without legislation. These include, among others, eliminating the 60-day rebuttable presumption for proprietary trading, providing greater flexibility for market-making, streamlining compliance program standards, and simplifying the "covered fund" definition.24 In the same vein, the OCC ANPR requests evidence and viewpoints as to the overall effects of the Volcker Rule's implementing regulations, including whether they have been effective or ineffective in appropriately limiting risk for banking entities, or whether the regulations are overbroad. Specific questions asked by the OCC include the following:

  • What types of objective factors could be used to better define "proprietary trading"?
  • Whether and how to revise the rebuttable presumption provisions of the proprietary trading definition.
  • Whether to replace the current covered fund definition that references Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 with a definition that references characteristics of the fund, such as investment strategy, fee structure, etc.?
  • Whether and how the rules could provide a carve-out from the banking entity definition for certain controlled foreign excluded funds?
  • How additional guidance or adjusted implementation of the existing covered fund provisions could help to distinguish more clearly between permissible and impermissible activities. For example, should the final rule be revised to clarify how the definition of "ownership interest" applies to securitizations?
  • Are there any types of entities for which compliance program requirements should be reduced or eliminated?
  • How could the final rule be revised to reduce burden associated with the compliance program and reporting requirements?

For non-US financial institutions, the ANPR represents an opportunity to describe how their access to US markets and ability to provide services to US customers have been affected by the Volcker Rule. For example, non-US banking entities may wish to consider describing how the regulations' exemptions for trading and fund investments "solely outside the United States" have affected overall operations, compliance burdens, access to markets, and competition.25

Commenters in general may also wish to suggest ways in which the multi-agency process for issuing regulatory guidance or relief could be streamlined.

Since changes to the regulations will require a reasoned basis, OCC has requested that commenters provide evidence and data to support any recommended changes to the regulations. The OCC has also requested information regarding the application of the regulations in practice. Therefore, market participants should consider sharing their experiences with interpreting the regulations and applying them in real-life situations, such as with respect to the determination of intent in the context of proprietary trading.

Comments on the ANPR are due no later than September 21, 2017.

© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. Proprietary Trading and Certain Interests in and Relationships With Covered Funds (Volcker Rule), 82 Fed. Reg. 36692 (Aug. 7, 2017).

  2. See Volcker Rule: Frequently Asked Questions (available at

  3. A Financial System that Creates Economic Opportunities: Banks and Credit Unions(2017) at 71.

  4. Treasury Report, at 71-78.

  5. ANPR at 36693.

  6. Under the statute and the implementing regulations, this term includes any insured depository institution, any company that controls an insured depository institution, or that is treated as a bank holding company for purposes of Section 8 of the International Banking Act of 1978, and any affiliate or subsidiary of such entity. 12 U.S.C. §1851(h)(1); 12 CFR §248.2(c).

  7. The regulations implementing the Volcker Rule appear at 12 CFR Part 44 (OCC); 12 CFR Part 248 (Board); 12 CFR Part 351 (FDIC); 17 CFR Part 75 (CFTC); 17 CFR Part 255 (SEC). In this Advisory, citations to implementing regulations will be to the OCC's version.

  8. See, e.g., Examining the Impact of the Volcker Rule on Markets, Businesses, Investors, and Job Creation, Statement of Thomas Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, US Chamber of Commerce before the House Committee on Financial Services, Subcommittee on Capital Markets, Securities, and Investment (Mar. 29, 2017), at 12; Bao, O'Hara and Zhou,The Volcker Rule and Market-Making In Times of Stress, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC (Sept. 2016). A recent report by staff of the SEC Division of Economic and Risk Analysis (DERA) states that "evidence for the impact of regulatory reforms on market liquidity is mixed, with different measures of market liquidity showing different trends."Report to Congress: Access to Capital and Market Liquidity(Aug. 2017), at 6. DERA reports that observed lower levels in some liquidity measurements, such as capital commitment by bond dealers, could be attributed to the Volcker Rule, but were also consistent with the interplay of other factors, such as changes to management of bond inventory, more efficient trading through electronic markets, and a low interest rate environment. At 8.

  9. See Letter from Richard Foster, Senior Vice President, Financial Services Roundtable, to Craig Phillips, Counselor to the Secretary, US Department of the Treasury (May 3, 2017), at 66.

  10. Board, FDIC and OCC, Statement Regarding Treatment of Certain Foreign Funds under the Rules Implementing Section 13 of the Bank Holding Company Act (Jul. 21, 2017).

  11. 12 CFR §248.10(b)(iii).

  12. 12 CFR §248.2(a).

  13. Statement Regarding Treatment of Certain Foreign Funds under the Rules Implementing Section 13 of the Bank Holding Company Act (July 21, 2017).

  14. Board, CFTC, FDIC, OCC, and SEC, Federal Regulatory Agencies Announce Coordination of Reviews for Certain Foreign Funds under "Volcker Rule" (Jul. 21, 2017).

  15. 12 CFR §44.3(b)(1)(i).

  16. 12 CFR §44.3(b)(2).

  17. ANPR at 36695.

  18. See, e.g.,Examining the Impact of the Volcker Rule on Markets, Businesses, Investors, and Job Creation, Statement of Thomas Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, US Chamber of Commerce before the House Committee on Financial Services, Subcommittee on Capital Markets, Securities, and Investment (Mar. 29, 2017), at 12; Bao, O'Hara and Zhou, The Volcker Rule and Market-Making In Times of Stress, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, Washington, DC (Sept. 2016).See also SEC DERA, Report to Congress: Access to Capital and Market Liquidity (Aug. 2017) (noting potential effects of regulation on liquidity).

  19. Banking entities were generally required to conform their fund investments to the Volcker Rule standards in July, 2015, although extensions were granted until July 21, 2017 for certain arrangements that were in place prior to the end of 2013.

  20. 12 CFR §248.10 et seq.

  21. See Treasury Report at 77; OCC, Federal Reserve, FDIC, SEC, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds; Final Rule at 5535, 5745-5746 (Jan. 31, 2014).

  22. Letter from Richard Foster, Senior Vice President, Financial Services Roundtable, to Craig Phillips, Counselor to the Secretary, US Department of the Treasury (May 3, 2017), at 67.

  23. Consent Order and Assessment of a Civil Money Penalty, FRB Docket Numbers 17-009-B-FB, 17-009-CMP-FB (available at

  24. Treasury Report at 132-133.

  25. 12 CFR §248.6(e), .13(e).See alsoVolcker Rule: Frequently Asked Questions, Question 13 (providing guidance with respect to activities conducted solely outside of the United States) (available at

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