Update on Regulatory Initiatives Regarding the Volcker Rule

August 28, 2017

As the general conformance period for banking entities to comply fully with Section 13 of the U.S. Bank Holding Company Act (Volcker Rule) and its implementing regulations (Volcker Regulations) ended on July 21, 2017, two recent regulatory actions in the U.S. may provide some relief to banking entities subject to the Volcker Rule:

(1) The five agencies in charge of enforcing the Volcker Regulations1 (Volcker Agencies) have provided time-limited relief with respect to the status of certain foreign funds as banking entities under the Volcker Regulations.

(2) The OCC is seeking public comment on how to improve the Volcker Regulations.

Foreign Excluded Funds Relief Extended through July 21, 2018

On July 21, 2017, the same day as the conformance period ended, the FRB, FDIC, and OCC released a statement (Statement) indicating that the Volcker Agencies would extend time-limited relief through July 21, 2018, for investment funds organized and offered outside of the United States that are excluded from the definition of “covered fund” under the Volcker Regulations (“foreign excluded funds”).2 This relief provides that foreign excluded funds would not be treated as banking entities under the Volcker Rule and Volcker Regulations, and that the agencies would not attribute those funds’ activities to their controlling banking entity during the one-year period ending July 21, 2018. This relief allows foreign excluded funds to engage in the full range of investment activities available to non-banking entity funds.

As background, the definition of “banking entity” has created myriad issues with respect to funds that are excluded from the definition of covered fund and, therefore through technical application of key definitions, may still be deemed to be a banking entity subject to the Volcker Rule.3 The Volcker Rule’s restrictions on proprietary trading and sponsoring or investing in covered funds generally apply only to entities meeting the definition of “banking entity,” which is defined to include depository institutions and companies that control them, as well as foreign banks that have branch or agency offices in the United States and any affiliate of such a banking entity. An “affiliate” of a banking entity is determined pursuant to the Bank Holding Company Act and the FRB’s Regulation Y, which provide that a company that controls, is controlled by, or is under common control with, another company is an affiliate of that other company. Thus, if a banking entity were deemed to “control” a foreign excluded fund, then that foreign excluded fund itself could be viewed as a banking entity subject to the Volcker Rule.4

As noted in the Statement, many foreign excluded funds “by virtue of typical corporate governance structures for funds sponsored by a foreign banking entity in a foreign jurisdiction or by virtue of investment by the foreign banking entity in the fund” would fall within the definition of banking entity as an affiliate or subsidiary of a foreign banking entity.

Therefore, under a technical reading of the Volcker Regulations, certain foreign excluded funds that are controlled by a foreign banking entity may be considered to be banking entities because foreign excluded funds are not covered funds and cannot avail themselves of that or any other exclusion from the definition of banking entity. This result would cause such foreign excluded funds to become subject to the Volcker Regulations, and would limit their ability to implement their investment strategy due to the Volcker Rule restrictions on proprietary trading.

This treatment of foreign excluded funds would be at odds with the Volcker Agencies’ efforts to limit the extraterritorial reach of the Volcker Regulations. The Statement notes that “foreign banking entities, foreign government officials, and other market participants have expressed concern about the possible unintended consequences and extraterritorial impact of the Volcker Rule and implementing regulations for” foreign excluded funds if they are considered banking entities. According to the Statement, many foreign banking entities and others have expressed concern that subjecting these foreign excluded funds to the requirements of the Volcker Rule “could put foreign excluded funds affiliated with foreign banking entities at a disadvantage in competing with foreign excluded funds that are not affiliated with a banking entity and are not subject to the requirements and restrictions of section 13 applicable to banking entities.” However, the Statement also notes concerns that a foreign banking entity could utilize a foreign excluded fund it controls to avoid the Volcker restrictions, “which could provide the foreign banking entity with competitive advantages over U.S. banking entities.”

The Volcker Agencies have not yet determined whether to grant general relief for foreign excluded funds in these circumstances, but, as a result of the concerns raised with respect to the treatment of foreign excluded funds, the Statement indicates that the Volcker Agencies will not propose to take any action “against a foreign banking entity based on attribution of the activities and investments of a qualifying foreign excluded fund ... to the banking entity, or against a qualifying foreign excluded fund as a banking entity” for a one-year period ending July 21, 2018. During this time, so long as a foreign banking entity’s relationship with a qualifying foreign excluded fund would comply with the so-called “SOTUS” exemption (for permitted covered fund activities that take place solely outside the United States as if the fund were a covered fund), the qualifying foreign excluded fund will not be subject to the Volcker Rule’s restrictions on banking entities.

For purposes of the Statement, a “qualifying foreign excluded fund” is defined as an entity that:

  1. Is organized or established outside of the United States and the ownership interests of which are offered and sold solely outside the United States;
  2. Would be a covered fund were the entity organized or established in the United States, or is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments;
  3. Would not otherwise be a banking entity except by virtue of the foreign banking entity’s acquisition or retention of an ownership interest in, or sponsorship of, the entity;
  4. Is established and operated as part of a bona fide asset management business; and
  5. Is not operated in a manner that enables the foreign banking entity to evade the requirements of the Volcker Rule or the Volcker Regulations.

OCC’s Request for Comment on the Volcker RegulationsThe OCC issued a notice seeking public input on 25 questions related to improving the Volcker Regulations (Notice) on August 2, 2017.5 The OCC stated that there is broad recognition that the Volcker Regulations should be improved in both design and application. In that regard, the OCC noted that the Treasury Department’s report regarding reform of the regulation of the banking system suggested that revisions to the Volcker Regulations should be considered. The deadline for filing comments is Thursday, September 21, 2017.

The Notice specifically focuses on four areas of concern with respect to the Volcker Regulations: (i) the scope of entities subject to the Volcker Regulations; (ii) the proprietary trading restrictions; (iii) the covered funds restrictions; and (iv) the compliance program and metrics reporting requirements. The OCC also is seeking input on ways to modify the Volcker Regulations so that banks with limited trading activities do not need to undertake the same efforts as banks with large trading operations. The OCC requests input on ways to clarify key definitions under the Volcker Regulations, including market-making (which is permitted under the Volcker Regulations) and the types of funds that should be considered covered funds. The OCC also requests public comment on how the Volcker Regulations could be revised to reduce the burden associated with the compliance program and metrics reporting required by the Volcker Regulations, and whether any of the measurements are unnecessary to evaluate compliance with the Volcker Regulations.

Regulatory Implications

In the Notice, the OCC also asks for public comment as to how the OCC, along with the FRB, FDIC, SEC and CFTC, can better coordinate their enforcement and supervisory efforts for the Volcker Regulations. The Volcker Rule gives regulators wide latitude to change the Volcker Regulations without any changes to the underlying statute, so if the OCC and the other Volcker Agencies are able to agree on a framework of changes to interpretations and enforcement that they use to oversee compliance with the Volcker Rule, legislative changes from Congress are not necessary. However, without reaching an agreement with the other regulators on potential changes, the OCC would only have the authority to make smaller interpretative and supervisory changes at the margins.

The Notice suggests the possibility that the Volcker Agencies will consider using their significant authority to modify the Volcker Regulations to address issues that both the regulators and banking organizations have identified. Organizations that have an interest in such reforms should consider submitting comments in response to the Notice. 


1) The five agencies are the Board of Governors of the Federal Reserve (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC).
2) FRB, FDIC, and OCC, Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing Section 13 of the Bank Holding Company Act (July 21, 2017). The FRB, FDIC, and OCC consulted with the SEC and CFTC in this regard.
3) See the FRB’s Volcker FAQ #14 (foreign public funds) and FAQ # 16 (registered investment companies).
4) For a discussion of a similar topic, please refer to Dechert OnPointVolcker Agencies Provide Guidance Regarding Treatment of Registered and Foreign Public Funds During Their Seeding Period.
5) Notice Seeking Public Input on the Volcker Rule, 82 Fed. Reg. 36692 (Aug. 7, 2017).

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