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OCC BULLETIN 2011-45
Subject: Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (the Volcker Rule)
Date: November 14, 2011
To: Chief Executive Officers of All National Banks, Federal Savings Associations, Federal Branches and Agencies, Department and Division Heads, and All Examining Personnel
Description: Notice of Proposed Rulemaking
The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the U.S. Securities and Exchange Commission (the agencies) are requesting comment on a proposed rule that would implement section 619 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act), which contains certain prohibitions and restrictions on the ability of a banking entity to engage in proprietary trading and to have certain interests in, or relationships with, a hedge fund or private equity fund (a covered fund).
Section 619 of the Dodd–Frank Act added a new section 13 to the Bank Holding Company Act of 1956 (BHC Act), which prohibits banking entities from engaging in proprietary trading or from acquiring or retaining any ownership interest in, or sponsoring, a covered fund. Section 13(d)(1) of that act, however, expressly exempts certain permitted activities from these prohibitions, including
Section 13(f) of the BHC Act separately prohibits a banking entity that serves, directly or indirectly, as the investment manager, investment adviser, or sponsor to a covered fund, and any affiliate of such a banking entity from entering into any transaction with the fund, or any other covered fund controlled by such fund, that would be a “covered transaction” as defined in section 23A of the Federal Reserve Act. Section 13(f) also provides that a banking entity may enter into certain prime brokerage transactions with any covered fund, but such transactions must be on market terms in accordance with the provisions of section 23B of the Federal Reserve Act.
Furthermore, under the statute, no banking entity may engage in a permitted activity if that activity would (i) involve or result in a material conflict of interest or material exposure of the banking entity to high-risk assets or high-risk trading strategies or (ii) pose a threat to the safety and soundness of the banking entity or to the financial stability of the United States.
The Proposed Rule
The proposed rule applies to all national banks (except for certain limited purpose trust banks), federal savings associations, federal branches and agencies, and their subsidiaries (banks). The proposal implements the statutory prohibitions and restrictions on proprietary trading and covered fund activities and investments set forth in section 13 and the related statutory exemptions for permitted activities described above. Banks that are engaged in activities or in making investments that are permissible under the proposed rule nevertheless are required to satisfy certain compliance requirements. The extent of the requirements escalates depending on the volume of the activity. In some cases, a compliance program is required, and at a minimum, banks that do not engage in activities or make investments that are prohibited or restricted by the proposed rule must put into place policies and procedures that are designed to prevent them from becoming engaged in such activities or from making such investments without establishing a compliance program required by the proposed rule.
The proposed rule is divided into four subparts and contains three appendixes, as follows:
The proposed rule was published in the Federal Register on November 7, 2011. See 76 Fed. Reg. 68846. Comments on the proposal will be accepted until close of business January 13, 2012. Because of its length, the proposed rule is not attached to this bulletin but can be found at http://www.gpo.gov/fdsys/pkg/FR-2011-11-07/pdf/2011-27184.pdf.
For further information about this bulletin, contact the Office of the Chief National Bank Examiner (202) 649-6360.
Julie L. Williams