82 FR 36692 - Proprietary Trading and Certain Interests in and Relationships With Covered Funds (Volcker Rule); Request for Public Input

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency

Federal Register Volume 82, Issue 150 (August 7, 2017)

The OCC is seeking the public's input with this request for information to assist in determining how the final rule implementing section 13 of the Bank Holding Company Act (commonly referred to as the ``Volcker Rule'') should be revised to better accomplish the purposes of the statute. The OCC also solicits comments suggesting improvements in the ways in which the final rule has been applied and administered to date. This OCC request is limited to regulatory actions that may be undertaken to achieve these objectives. The OCC is not requesting comment on changes to the underlying Volcker statute. The OCC recognizes that any revision to the final rule or the administration of that rule must be done consistent with the constraints of the statute and requests that commenters provide input that fits within the contours of that structure.

[Federal Register Volume 82, Number 150 (Monday, August 7, 2017)]
[Proposed Rules]
[Pages 36692-36697]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-16556]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 82, No. 150 / Monday, August 7, 2017 / 
Proposed Rules

[[Page 36692]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 44

[Docket ID OCC-2017-0014]


Proprietary Trading and Certain Interests in and Relationships 
With Covered Funds (Volcker Rule); Request for Public Input

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury.

ACTION: Request for information.

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SUMMARY: The OCC is seeking the public's input with this request for 
information to assist in determining how the final rule implementing 
section 13 of the Bank Holding Company Act (commonly referred to as the 
``Volcker Rule'') should be revised to better accomplish the purposes 
of the statute. The OCC also solicits comments suggesting improvements 
in the ways in which the final rule has been applied and administered 
to date. This OCC request is limited to regulatory actions that may be 
undertaken to achieve these objectives. The OCC is not requesting 
comment on changes to the underlying Volcker statute. The OCC 
recognizes that any revision to the final rule or the administration of 
that rule must be done consistent with the constraints of the statute 
and requests that commenters provide input that fits within the 
contours of that structure.

DATES: Comments should be submitted by September 21, 2017.

ADDRESSES: You may submit comments to the OCC by any of the methods set 
forth below. Because paper mail in the Washington, DC area and at the 
OCC is subject to delay, commenters are encouraged to submit comments 
through the Federal eRulemaking Portal or email, if possible. Please 
use the title ``Volcker Rule; Request for Information'' to facilitate 
the organization and distribution of the comments. You may submit 
comments by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
www.regulations.gov. Enter ``Docket ID OCC-2017-0014'' in the Search 
Box and click ``Search.'' Click on ``Comment Now'' to submit public 
comments.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., Suite 
3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2017-0014'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not include any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this request for information by any of the following methods:
     Viewing Comments Electronically: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2017-0014'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen. Comments and supporting materials can be filtered 
by clicking on ``View all documents and comments in this docket'' and 
then using the filtering tools on the left side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov. The docket may be viewed 
after the close of the comment period in the same manner as during the 
comment period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 649-
6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-
5597. Upon arrival, visitors will be required to present valid 
government-issued photo identification and submit to security screening 
in order to inspect and photocopy comments.

FOR FURTHER INFORMATION CONTACT: Ted Dowd, Director; Suzette Greco, 
Assistant Director; Tabitha Edgens, Senior Attorney; Mark O'Horo, 
Attorney, Securities and Corporate Practices Division, (202) 649-5510; 
Patrick Tierney, Assistant Director, Legislative and Regulatory 
Activities Division, (202) 649-5490, 400 7th Street SW., Washington, DC 
20219.

SUPPLEMENTARY INFORMATION: 
    The OCC gives notice that it is seeking the public's input to 
assist in determining how the final rule implementing section 13 of the 
Bank Holding Company Act \1\ (the ``final rule'') should be revised to 
better accomplish the purposes of the statute. The OCC also solicits 
comments suggesting improvements in the ways the final rule has been 
applied and administered to date. The request for information published 
here also is available on the OCC's Web site.
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    \1\ 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).
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    As this request for information describes, there is broad 
recognition that the final rule should be improved both in design and 
in application. A report recently issued by the Department of the 
Treasury \2\ (``Treasury Report'') identifies problems with the design 
of the final rule--the inclusion of a ``purpose'' test for defining 
proprietary trading, for example. The report also contains 
recommendations for revisions to the final rule. The OCC's objective in 
issuing this request for information is to gather additional, more 
specific information that could provide focused support for any 
reconsideration of the final rule that the rulewriting agencies

[[Page 36693]]

may undertake and contribute to the development of the bases for 
particular changes that may be proposed.
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    \2\ U.S. Department of the Treasury Report, A Financial System 
that Creates Economic Opportunities: Banks and Credit Unions (2017), 
pp. 71-78, 132-133.
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    The information that the OCC is soliciting could support the 
revisions to the final rule advanced in the Treasury Report and 
elsewhere; it also may support additional revisions that are consistent 
with the spirit of the Treasury Report. In any case, the OCC and the 
other Volcker rulewriting agencies will need to explain the basis for 
any changes to the current rule that may be proposed. The OCC 
recognizes that revisions to the current rule must be undertaken 
jointly by the OCC, the Board of Governors of the Federal Reserve 
System, and the Federal Deposit Insurance Corporation and in 
consultation and coordination with the Securities and Exchange 
Commission and the Commodity Futures Trading Commission. The OCC 
anticipates that the information solicited here--that is, information 
and data describing with specificity any burdens or inefficiencies 
resulting from the current rule and explaining how particular revisions 
would alleviate those burdens or inefficiencies--would be useful to 
inform the drafting of a proposed rule.

Seeking Public Input on the Volcker Rule

I. Background

    Section 619 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act'') created a new section 13 of the 
Bank Holding Company Act (``BHC Act''), which generally prohibits 
``banking entities'' (e.g., insured depository institutions, companies 
that control an insured depository institution, and their affiliates 
and subsidiaries) from engaging in proprietary trading and from holding 
an ownership interest in, sponsoring, or having certain relationships 
with hedge fund and private equity funds.\3\ Section 13 of the BHC Act 
authorized the Office of the Comptroller of the Currency (``OCC''), 
Board of Governors of the Federal Reserve System (the ``Board''), 
Federal Deposit Insurance Corporation (``FDIC''), Commodity Futures 
Trading Commission (``CFTC''), and Securities and Exchange Commission 
(``SEC'') (together, the ``Agencies'') to issue implementing 
regulations.\4\ The Agencies issued final regulations implementing 
section 13 in December 2013, with an effective date of April 1, 
2014.\5\ Banking entities were generally required to conform their 
proprietary trading activities and investments to the requirements of 
section 13 and the final rule (together, the ``Volcker Rule'') by July 
21, 2015.\6\
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    \3\ See 12 U.S.C. 1851.
    \4\ The federal banking agencies (i.e., the OCC, the Board, and 
the FDIC) must act jointly to issue final regulations with respect 
to insured depository institutions. 12 U.S.C. 1851(b)(2)(B)(i)(I). 
The five Agencies, in developing and issuing final rules, must 
consult and coordinate with each other, as appropriate, for the 
purposes of assuring, to the extent possible, that such rules are 
comparable and provide for consistent application and implementation 
of the applicable provisions of Section 13. 12 U.S.C. 
1851(b)(2)(B)(ii).
    \5\ 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).
    \6\ See Board Order Approving Extension of Conformance Period 
(Dec. 31, 2014). The Board also granted two additional one-year 
extensions (until July 21, 2017) for ``legacy'' covered funds (i.e., 
covered fund relationships and investments that were in place prior 
to December 31, 2013). See Board Order Approving Extension of 
Conformance Period Under Section 13 of the Bank Holding Company Act 
(Dec. 18, 2014); Board Order Approving Extension of Conformance 
Period Under Section 13 of the Bank Holding Company Act (July 6, 
2016). In 2017, the Board approved banking entity applications for 
additional transition periods of up to five years for specified 
legacy ``illiquid funds.''
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    The final rule's proprietary trading provisions generally prohibit 
banking entities from engaging, as principal, in short-term trading of 
certain securities, derivatives, commodity futures and options on these 
instruments.\7\ The final rule's covered funds provisions generally 
prohibit banking entities from acquiring or retaining an ownership 
interest in, sponsoring, or having certain relationships with a hedge 
fund or private equity fund (``covered fund''). The final rule defines 
the term covered fund to include any issuer that would be an investment 
company under the Investment Company Act of 1940 if it were not 
otherwise excluded by sections 3(c)(1) or 3(c)(7) of that Act, as well 
as certain foreign funds and commodity pools.\8\ The proprietary 
trading prohibition and the covered funds prohibition are subject to a 
number of exclusions and exemptions. Banking entities of all sizes are 
subject to the Volcker Rule and are generally required to establish an 
internal compliance program reasonably designed to ensure and monitor 
compliance with the Volcker Rule.\9\
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    \7\ See 12 CFR part 44, subpart B.
    \8\ See 12 CFR part 44, subpart C.
    \9\ See 12 CFR part 44, subpart D. See section titled 
``Compliance Program and Metrics Reporting Requirements'' below for 
additional background on the Volcker Rule compliance program 
requirements.
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    The Volcker Rule was intended to promote the safety and soundness 
of banking entities and prevent taxpayer bailouts by minimizing bank 
exposure to certain proprietary trading and fund activities that could 
involve undue risk. At the same time, the Volcker Rule was designed to 
permit banking entities to continue providing client-oriented financial 
services that are critical to capital generation and that facilitate 
liquid markets.\10\ Some have asserted that the Volcker Rule has 
succeeded in accomplishing these goals in some respects.\11\ However, 
others have identified difficulties in interpreting and applying some 
of the final rule's provisions.\12\ Many have argued that the final 
rule is overly complex and vague.\13\ Banking entities in particular 
have suggested that, despite their best efforts, they sometimes are not 
able to distinguish permissible from prohibited activities.\14\ Banking 
entities also have suggested that the Volcker Rule is overbroad and 
restricts a number of essential financial functions, potentially 
restricting activities that could spur economic growth. In particular, 
firms have suggested that they have been forced to curtail economically 
useful market-making, hedging, and asset-liability management to avoid 
violating the proprietary trading prohibition.\15\

[[Page 36694]]

The covered funds prohibition has also been criticized for capturing 
investment vehicles that facilitate lending activity and capital 
formation, even though they may not be equivalent to traditional 
private equity funds or hedge funds.\16\
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    \10\ See 79 FR 5535, 5541.
    \11\ See, e.g., Marc Jarsulic, Vice President, Economic Policy, 
Center for American Progress, Testimony before the House Committee 
on Financial Services, Subcommittee on Capital Markets, Securities, 
and Investment, U.S. House of Representatives (Mar. 29, 2017), 
(arguing the Volcker Rule has caused banks to exit proprietary 
trading activities but has not caused a significant impact on 
corporate bond market liquidity).
    \12\ See, e.g., Daniel K. Tarullo, Governor of the Federal 
Reserve System, Departing Thoughts at the Woodrow Wilson School, 
Princeton University (April 4, 2017) (``Departing Thoughts''); 
William C. Dudley, President and Chief Executive Officer of the 
Federal Reserve Bank of New York, Remarks at the Princeton Club of 
New York (April 7, 2017) (``Princeton Club''); Examining the Impact 
of the Volcker Rule on the Markets, Businesses, Investors, and Job 
Creators: Hearing on the Volcker Rule Before the Subcomm. On Capital 
Markets, Securities, and Investment of the House Comm. On Financial 
Services, 115th Cong. (2017); American Bankers Association, The 
Volcker Rule: Islands of Permission in a Sea of Prohibition (2017); 
Institute of International Bankers, U.S. Supervision and Regulation 
of International Banks: Recommendations for the Report of the 
Treasury Secretary (2017); Financial Services Roundtable, FSR 
Recommendations for Aligning Financial Regulation With Core 
Principles (2017); The Clearing House, Submission to the U.S. 
Treasury Department: Aligning the U.S. Bank Regulatory Framework 
with the Core Principles of Financial Regulation (2017).
    \13\ See, e.g., U.S. Department of the Treasury Report, A 
Financial System that Creates Economic Opportunities: Banks and 
Credit Unions (2017) (``The rule has spawned an extraordinarily 
complex and burdensome compliance regime due to a combination of 
factors . . .''); Tarullo, Departing Thoughts; American Bankers 
Association.
    \14\ See, e.g., American Bankers Association (``. . . in many 
cases, a bank may not know whether it is engaged in impermissible 
activities until it is notified in the course of a bank 
examination.'').
    \15\ See, e.g., American Bankers Association (``The goal should 
be to provide certainty that the rules will not impede banks from 
engaging in bona fide market-making, asset liability management, 
hedging, and other trading activities. . . .''); Financial Services 
Roundtable (``For example, the bank issues public debt for funding 
purposes and then swaps the payments to fixed for floating through a 
plain-vanilla interest-rate swap in order to meet its asset-
liability management objectives. Again, this is not an activity, 
that we believe the architects of the Volcker Rule envisioned 
including within the Rule's restrictions, but resident examiners and 
their legal departments have interpreted it as such.'').
    \16\ See, e.g., Institute of International Bankers (``The 
Agencies' approach has therefore resulted in an overly broad 
definition of covered fund that goes well beyond the original intent 
to capture private equity funds and hedge funds, and the list of 
enumerated exclusions fails to exclude many vehicles that are not 
equivalent to traditional private equity funds or hedge funds.''); 
Financial Services Roundtable (``This approach, however, remains 
overly broad. For example, it captures funds that invest solely in 
funds that are otherwise excluded funds, some plain-vanilla 
securitizations, and re-REMICs.'').
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    The OCC is seeking the public's input on whether aspects of the 
final rule and its implementation should be revised to better 
accomplish the purposes of section 13 of the BHC Act while decreasing 
the compliance burden on banking entities and fostering economic 
growth. In particular, the OCC is inviting input on ways to tailor 
further the rule's requirements and clarify key provisions that define 
prohibited and permissible activities. The OCC is also inviting input 
on how the existing rule could be implemented more effectively without 
revising the regulation. The OCC encourages the public to submit data 
addressing the effectiveness of the rule and its implementation, the 
current compliance burden, and any need for additional guidance and/or 
proposed revisions to the rule.
    The OCC recognizes that any revisions to the final rule would need 
to be undertaken together with the other Agencies. Revisions would 
require the Agencies to articulate a reasoned basis for the changes, so 
it is especially important for those commenting to provide evidence 
demonstrating the nature and scope of the problems they identify and 
the likely efficacy of any solutions they propose. The OCC believes the 
information gathered in response to this request for information would 
be helpful in that regard.
    This request for information identifies four broad areas for the 
public's consideration: (1) The scope of entities to which the final 
rule applies; (2) the proprietary trading restrictions; (3) the covered 
fund restrictions; and (4) the compliance program and metrics reporting 
requirements. However, the OCC is inviting comments on all aspects of 
the final rule and its administration. The request for information is 
limited to regulatory actions that may be undertaken to better 
accomplish the purpose of the statute and improve the way the final 
rule has been applied and administered to date. The OCC is not 
requesting comment on changes to the underlying Volcker statute. 
Regulatory actions that may be undertaken to achieve these objectives 
will be subject to the constraints of the statute. For instance, 
activity the Agencies may permit under the market-making or risk 
mitigating hedging exceptions to the general proprietary trading 
prohibition are subject to statutory safety and soundness and financial 
stability backstops, as well as other conditions.

II. Topics and Questions

    The OCC is particularly interested in receiving comments and 
supporting data on the following topics and questions: \17\
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    \17\ For purposes of this information request, ``data'' includes 
both quantitative and qualitative information, as well as other 
verifiable evidence supporting respondents' comments and 
suggestions.
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Scope of Entities Subject to the Rule

    The Volcker Rule's statutory prohibition applies to any ``banking 
entity,'' \18\ a term that is defined to include 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.\19\ The Agencies adopted this 
definition in the final rule and provided a limited number of specific 
exclusions.\20\
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    \18\ 12 U.S.C. 1851(a)(1).
    \19\ 12 U.S.C. 1851(h)(1).
    \20\ The final rule excludes from the definition of ``banking 
entity'' (i) a covered fund that does not itself meet the definition 
of banking entity, (ii) a portfolio company held under the authority 
of section 4(k)(4)(H) or (I) of the BHC Act or any portfolio concern 
defined under 13 CFR 107.50 that is controlled by a small business 
investment company, and (iii) the FDIC acting in its corporate 
capacity or as a conservator or receiver under the Federal Deposit 
Insurance Act or Title II of the Dodd-Frank Act. 12 CFR 44.2(c).
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    As a result of this definition, the Volcker Rule prohibitions and 
compliance program requirements apply to many entities that may not 
pose systemic risk concerns, such as small community banks engaged 
primarily in traditional banking activities and other banks that do not 
engage in the type of activities, or in activities that present the 
type of risk, that the Volcker Rule was designed to restrict. For 
example, banks with minimal or no proprietary trading activities are 
subject to the final rule. Many of these institutions have reported 
experiencing a significant regulatory burden. The final rule's tailored 
compliance program requirements were intended to reduce the Volcker 
Rule's economic impact on small banking entities,\21\ but even 
determining whether an entity is eligible for the simplified program 
can pose a significant burden for small banks.\22\ In addition, certain 
activities of small banks have been caught up in the proprietary 
trading prohibition. Exempting small banking entities and other banking 
entities without substantial trading activities would enable them to 
reduce their compliance costs and devote more resources to local 
lending without materially increasing risk to the financial system.\23\
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    \21\ The OCC, Board, and FDIC statement on the Volcker Rule's 
applicability to community banks, released concurrently with the 
final rule, recognized that ``the vast majority of these community 
banks have little or no involvement in prohibited proprietary 
trading or investment activities in covered funds. Accordingly, 
community banks do not have any compliance obligations under the 
final rule if they do not engage in any covered activities other 
than trading in certain government, agency, State or municipal 
obligations.'' Board, FDIC, and OCC, The Volcker Rule: Community 
Bank Applicability (Dec. 10, 2013).
    \22\ Toney Bland, Senior Deputy Comptroller for Midsize and 
Community Bank Supervision, OCC, Testimony before the House 
Committee on Financial Services, Subcommittee on Financial 
Institutions and Consumer Credit (Apr. 23, 2015), (``[C]ommunity 
banks need to ascertain whether their activities are covered by the 
Volcker Rule in order to understand whether they have any compliance 
obligations. Making this determination may require them to expend 
money and resources--for example, by hiring attorneys and 
consultants. This regulatory burden is not justified by the risk 
these institutions present.''). See also, Tarullo, Departing 
Thoughts.
    \23\ Acting Comptroller of the Currency Keith Noreika, Testimony 
before the Senate Banking Committee (Jun. 22, 2017) (``Applying the 
Rule to community banks engaged primarily in traditional banking 
activities or to institutions that are not materially engaged in 
risky trading activities does not further the statutory purpose. 
Exempting community banks and providing an off-ramp for larger 
institutions depending on the nature and scope of their trading 
activities would reduce complexity, cost, and burden associated with 
the Volcker Rule by providing a tailored approach to addressing the 
risks the Rule was designed to contain.''). See also, Dudley, 
Princeton Club (``For smaller institutions, the regulatory and 
compliance burdens can be considerably lighter because the failure 
of such a firm will not impose large costs or stress on the broader 
financial system. Also, we must recognize that smaller firms have 
less ability to spread added compliance costs across their business. 
All else equal, an increase in compliance burden can create an 
unintended competitive advantage for larger institutions. We should 
also recognize the important role that smaller banking institutions 
have in supporting local communities around the country.'').
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    The banking entity definition also extends to foreign subsidiaries 
of foreign

[[Page 36695]]

banking organizations acting outside of the United States. In 
particular, foreign banking organizations have raised questions 
regarding non-U.S. entities that are not covered funds under section 
10(b)(iii) of the final rule (``foreign excluded funds'') and whether 
such funds may become banking entities if they are ``controlled'' by a 
banking entity.\24\ Foreign banking entities that sponsor foreign non-
covered funds in some foreign jurisdictions may, by virtue of typical 
corporate governance structures for funds in these jurisdictions, be 
deemed to ``control'' a foreign non-covered fund for purposes of the 
BHC Act.\25\ These corporate governance structures have raised 
questions regarding whether foreign non-covered funds that are 
sponsored by foreign banking entities and offered solely outside the 
U.S. and in accordance with foreign laws are banking entities under the 
final rule. The OCC, Board, and FDIC, in consultation with the SEC and 
CFTC, issued a statement of policy on July 21, 2017, announcing that 
the three Federal banking agencies are coordinating review of the 
treatment of these funds under the final rule and providing that they 
would not propose to take action with respect to such foreign funds 
during the one-year period prior to July 21, 2018, if they meet the 
criteria specified in the statement of policy.
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    \24\ See Board, 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); Board, CFTC, FDIC, OCC, 
and SEC, Joint Release, Federal Regulatory Agencies Announce 
Coordination of Reviews for Certain Foreign Funds under ``Volcker 
Rule'' (July 21, 2017).
    \25\ For example, sponsors of foreign funds in some foreign 
jurisdictions may select the majority of the fund's directors or 
trustees, or otherwise control the fund for purposes of the BHC Act 
by contract or through a controlled corporate director.
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Questions on Scope of Entities Subject to the Rule

    1. What evidence is there that the scope of the final rule is too 
broad?
    2. How could the final rule be revised to appropriately narrow its 
scope of application and reduce any unnecessary compliance burden? What 
criteria could be used to determine the types of entities or activities 
that should be excluded? Please provide supporting data or other 
appropriate information.
    3. How would an exemption for the activities of these banking 
entities be consistent with the purposes of the Volcker Rule and not 
compromise safety and soundness and financial stability? Please include 
supporting data or other appropriate information.
    4. How could the rule provide a carve-out from the banking entity 
definition for certain controlled foreign excluded funds? How could the 
rule be tailored further to focus on activities with a U.S. nexus?
    5. Are there other issues related to the scope of the final rule's 
application that could be addressed by regulatory action?

Proprietary Trading Prohibition

    The final rule, like the statute, defines proprietary trading as 
engaging as principal for the trading account of the banking entity in 
any purchase or sale of one or more financial instruments. Building 
upon the statutory definition,\26\ the final rule adopted a three 
pronged definition of ``trading account.'' The first prong includes 
within the definition any account used by a banking entity to purchase 
or sell one or more financial instruments 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.\27\ Banking entities and commentators have 
asserted that this prong of the definition imposes a significant 
compliance burden because it requires determining the intent associated 
with each trade.
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    \26\ 12 U.S.C. 1851(h)(6) (defining ``trading account'').
    \27\ 12 CFR 44.3(b)(1)(i). The other two prongs of the trading 
account definition are the ``market risk capital prong,'' which 
applies to the purchase or sale of financial instruments that are 
both market risk capital rule covered positions and trading 
positions, and the ``dealer prong,'' which applies to the purchase 
or sale of financial instruments by a banking entity that is 
licensed or registered, or required to be licensed or registered, as 
a dealer, swap dealer, or security-based swap dealer, to the extent 
the instrument is purchased or sold in connection with the 
activities that require the banking entity to be licensed or 
registered as such. 12 CFR 44.3(b)(1)(ii) and (iii).
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    In addition, the final rule provides that the purchase or sale of a 
financial instrument will be presumed to be for the trading account 
under the first prong of the trading account definition if the banking 
entity holds the financial instrument for fewer than 60 days or 
substantially transfers the risk of the position within 60 days.\28\ If 
a banking entity sells or transfers the risk of a position within 60 
days, it must be able to demonstrate that it did not purchase or sell 
the instrument for short-term trading purposes. Some banking entities 
have said that many transactions are presumed to be proprietary trading 
as a result of this provision, including transactions that were not the 
intended target of the proprietary trading restriction.
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    \28\ 12 CFR 44.3(b)(2).
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    The Volcker statute and the final rule provide several exclusions 
and exemptions from the proprietary trading prohibition.\29\ However, 
banking entities have reported that complying with these exclusions and 
exemptions is unduly burdensome and the final rule's requirements may 
result in banking entities underutilizing them. In particular, industry 
groups, members of Congress, and others have argued that the rule does 
not provide sufficient latitude for banking entities to engage in 
market-making, which they have argued may have a negative impact on 
some measures of market liquidity.\30\
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    \29\ 12 U.S.C. 1851(d); 12 CFR 44.3(d), 44.4, 44.5, 44.6.
    \30\ See, e.g., Thomas Quaadman, Executive Vice President, 
Center for Capital Markets Competitiveness, U.S. Chamber of 
Commerce, Statement to House Committee on Financial Services, 
Subcommittee on Capital Markets, Securities, and Investment, U.S. 
House of Representatives (Mar. 29, 2017) (``It is very difficult to 
distinguish between market making and proprietary trading without 
arbitrarily imposing a demarcation. The Volcker Rule significantly 
constrains their ability by dictating how banks should manage their 
inventory. This will reduce the depth and liquidity of our capital 
markets.''); Tarullo, Departing Thoughts (``Achieving compliance 
under the current approach would consume too many supervisory, as 
well as bank, resources relative to the implementation and oversight 
of other prudential standards. And although the evidence is still 
more anecdotal than systematic, it may be having a deleterious 
effect on market making, particularly for some less liquid 
issues.'').
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Questions on the Proprietary Trading Prohibition

    1. What evidence is there that the proprietary trading prohibition 
has been effective or ineffective in limiting banking entities' risk-
taking and reducing the likelihood of taxpayer bailouts? What evidence 
is there that the proprietary trading prohibition does or does not have 
a negative impact on market liquidity?
    2. What type of objective factors could be used to define 
proprietary trading?
    3. Should the rebuttable presumption provision be revised, whether 
by elimination, narrowing, or introduction of a reverse presumption 
that presumes activities are not proprietary trading? Are there 
activities for which rebuttal should not be available? Should rebuttal 
be available for specified categories of activity? Could the rebuttable 
presumption provision be implemented in a way that decreases the 
compliance burden for banking entities?
    4. What additional activities, if any, should be permitted under 
the proprietary trading provisions? Please provide a description of the 
activity and

[[Page 36696]]

discuss why it would be appropriate to permit the activity, including 
supporting data or other appropriate information.
    5. How could the existing exclusions and exemptions from the 
proprietary trading prohibition--including the requirements for 
permissible market-making and risk mitigating hedging activities--be 
streamlined and simplified? For example, does the distinction between 
``market-maker inventory'' and ``financial exposure'' help ensure that 
trading desks using the market-making exemption are providing liquidity 
or otherwise functioning as market makers?
    6. How could additional guidance or adjusted implementation of the 
existing proprietary trading provisions help to distinguish more 
clearly between permissible and impermissible activities?
    7. Are there any other issues related to the proprietary trading 
prohibition that should be addressed by regulatory action?

Covered Funds Prohibition

    Section 13 of the BHC Act generally prohibits banking entities from 
acquiring or holding an ownership in or sponsoring any private equity 
fund or hedge fund.\31\ Section 13 defines a hedge fund or private 
equity fund as an issuer that would be an investment company, as 
defined in the Investment Company Act of 1940 but for section 3(c)(1) 
or 3(c)(7) of that Act, or such similar funds as the Agencies may, by 
rule, determine. The Agencies adopted the definition referencing 
sections 3(c)(1) and 3(c)(7) of the Investment Company Act in the final 
rule and also included certain commodity pools and foreign funds in the 
covered fund definition.\32\ Recognizing that this definition may apply 
more broadly than necessary to achieve the Volcker Rule's purposes, the 
Agencies excluded several categories of issuers from the definition of 
covered fund in the final rule and established requirements for certain 
permitted covered fund activities, such as organizing and offering a 
covered fund,\33\ market making in covered fund interests,\34\ and 
covered fund activities and investments outside of the United 
States.\35\ Some have suggested that, notwithstanding the exclusions 
currently provided, the statutory definition referencing sections 
3(c)(1) and 3(c)(7) of the Investment Company Act continues to include 
within its scope many issuers that were not intended to be covered by 
section 13.\36\
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    \31\ 12 U.S.C. 1851(a)(1)(B).
    \32\ 12 CFR 44.10(b)(1)(ii) and (iii).
    \33\ 12 CFR 44.11(a).
    \34\ 12 CFR 44.11(c).
    \35\ 12 CFR 44.13(b).
    \36\ See American Bankers Association (``[T]he Volcker Rule 
regulations should apply only to those hedge funds and private 
equity funds that engage primarily in proprietary trading for near-
term investment gains, thereby excluding funds (such as venture 
capital funds) . . . that do not raise the risks the Volcker Rule is 
intended to address.''); The Clearing House (``While the Agencies 
must implement the statute as Congress has enacted it, they have 
extended its reach to numerous other types of funds that bear little 
in relation to either private equity or hedge funds.'').
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    The final rule also implements section 13's restrictions on 
relationships with hedge funds and private equity funds.\37\ The so-
called ``Super 23A'' provision prohibits a banking entity that serves 
as investment manager, adviser, or sponsor to a covered fund from 
entering into a transaction with the covered fund (or any other covered 
fund controlled by the covered fund) if the transaction would be a 
covered transaction as defined in section 23A of the Federal Reserve 
Act.\38\
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    \37\ 12 U.S.C. 1851(f).
    \38\ 12 U.S.C. 371c; 12 CFR 44.14; 12 CFR part 223.
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Questions on the Covered Funds Prohibition

    1. What evidence is there that the final rule has been effective or 
ineffective in limiting banking entity exposure to private equity funds 
and hedge funds? What evidence is there that the covered fund 
definition is too broad in practice?
    2. Would replacing 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., reduce the compliance 
burden associated with the covered fund provisions? If so, what 
specific characteristics could be used to narrow the covered fund 
definition? Does data or other appropriate information support the use 
of a characteristics-based approach to fund investments?
    3. What types of additional activities and investments, if any, 
should be permitted or excluded under the covered funds provisions? 
Please provide a description of the activity or investment and discuss 
why it would be appropriate to permit the activity or investment, 
including supporting data or other appropriate information.
    4. Is section 14 of the final rule (the ``Super 23A'' provision) 
effective at limiting bank exposure to covered funds? Are there 
additional categories of transactions and relationships that should be 
permitted under this section?
    5. How could additional guidance or adjusted implementation of the 
existing covered fund provisions 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?
    6. Are there any other issues related to the covered funds 
prohibition that could be addressed by regulatory action?

Compliance Program and Metrics Reporting Requirements

    The final rule adopted a tiered compliance program requirement 
based on the size, complexity, and type of activity conducted by each 
banking entity. Banking entities that do not engage in activities 
covered by the final rule other than trading in government obligations 
are not required to establish a compliance program unless they become 
engaged in covered activities.\39\ Banking entities with assets of $10 
billion or less are eligible for a simplified compliance program.\40\ 
Nonetheless, banking entities have reported that the compliance program 
requirements in the final rule present a compliance burden, especially 
for small institutions that are not engaged in significant levels of 
proprietary trading and covered fund activities. Section 20 and 
Appendix A of the final rule require certain of the largest banking 
entities engaged in significant trading activities to collect, 
evaluate, and furnish data regarding covered trading activities as an 
indicator of areas meriting additional attention by the banking entity 
and relevant Agency.\41\
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    \39\ 12 CFR 44.20(f)(1).
    \40\ 12 CFR 44.20(f)(2).
    \41\ 79 FR 5535, 5540.
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Questions on the Compliance Program, Metrics Reporting Requirements, 
and Additional Issues

    1. What evidence is there that the compliance program and metrics 
reporting requirements have facilitated banking entity compliance with 
the substantive provisions of the Volcker Rule? What evidence is there 
that the compliance program and metrics reporting requirements present 
a disproportionate or undue burden on banking entities?
    2. How could the final rule be revised to reduce burden associated 
with the compliance program and reporting requirements? Responses 
should include supporting data or other appropriate information.

[[Page 36697]]

    3. Are there categories of entities for which compliance program 
requirements should be reduced or eliminated? If so, please describe 
and include supporting data or other appropriate information.
    4. How effective are the quantitative measurements currently 
required by the final rule? Are any of the measurements unnecessary to 
evaluate Volcker Rule compliance? Are there other measurements that 
would be more useful in evaluating Volcker Rule compliance?
    5. How could additional guidance or adjusted implementation of the 
existing compliance program and metrics reporting provisions reduce the 
compliance burden? For example, should the rule permit banking entities 
to self-define their trading desks, subject to supervisory approval, so 
that banking entities report metrics on the most meaningful units of 
organization?
    6. How could the final rule be revised to enable banking entities 
to incorporate technology-based systems when fulfilling their 
compliance obligations under the Volcker Rule? Could banking entities 
implement technology-based compliance systems that allow banking 
entities and regulators to more objectively evaluate compliance with 
the final rule? What are the advantages and disadvantages of using 
technology-based compliance systems when establishing and maintaining 
reasonably designed compliance programs?
    7. What additional changes could be made to any other aspect of the 
final rule to provide additional clarity, remove unnecessary burden, or 
address any other issues?

    Dated: August 1, 2017.
Keith A. Noreika,
Acting Comptroller of the Currency.
[FR Doc. 2017-16556 Filed 8-4-17; 8:45 am]
 BILLING CODE 4810-33-P