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mThe Volcker Rule: The Agencies’ Proposed Rules

Charles M. HornOliver Ireland

November 21, 2011

DC-648839

This is MoFo. 2

The Volcker Rule: The Agencies’ Proposed Rules

Basics and Some History Compliance and Reporting Requirements Proprietary Trading Private Equity Funds and Hedge Funds Restrictions and Limitations on Permitted Activities Impact Issues

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Basics and Some History

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Basics

The statutory Volcker Rule (Dodd-Frank Act section 619) contains two broad prohibitions for banking entities

No proprietary trading No ownership interest in or sponsorship of a private equity or

hedge fund

The statutory Volcker Rule contains other requirements Transactions prohibited that would result in material conflicts of

interest, material exposure to high-risk assets or activities, threaten the safety or soundness of the banking entity, or pose a threat to U.S. financial stability

Certain financial relationships with covered funds are prohibited Nonbank financial firms may be subject to activities

restrictions/capital charges Agencies must issue rules covering internal controls and

recordkeeping to insure compliance with statute

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Basics

For nonbanking entities: Statutory prohibitions on proprietary trading and private equity

fund/hedge fund ownership or sponsorship do not apply A nonbanking financial company that is systemically important will

be subject to additional capital requirements and quantitative limits on proprietary trading and ownership in or sponsorship of a private equity or hedge fund

Prohibited proprietary trading and private fund activities contain several important conditional exceptions

Proprietary trading exceptions for trading in exempted instruments, underwriting and market-making activities, hedging/risk-mitigation activities, and customer activities

Private fund prohibition exceptions for owned/offered funds

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History

Volcker Rule “embraces the spirit of the Glass-Steagall Act’s separation of ‘commercial’ from ‘investment’ banking by restoring a protective barrier around our critical financial infrastructure.”

Cong. Merkley (D-MA)

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History

Rule is intended to “prohibit or restrict certain types of financial activity … that are high-risk or which create significant conflicts of interest”

Intent of prohibition is to: Limit threats to safety and soundness Limit threats to financial stability Eliminate any economic subsidy to high-risk activities that is

provided by access to lower-cost capital because of participation in the regulatory safety net

Senate Banking Committee (April 2010)

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Chronology–History

January 2009: Group of 30 Report Proprietary trading a major reason for the financial crisis Recommends prohibition on proprietary trading by systemically important

institutions

June 2009: Administration proposals; no Volcker-type provisions December 2009: H.R. 4173 passed; no Volcker-type provisions January 2010: Obama Administration announces support for Rule April 2010: Merkley-Levin Amendment May 2010: S. 3217, passed, with amendment July 2010: Conference committee adds “de minimis” exception to

private equity/hedge fund prohibition July 21, 2010: Dodd-Frank Act signed into law

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Chronology–Post-Enactment

November 2010: FRB proposes rule on conformance periods Jan. 2011: FSOC publishes required study Feb. 2011: FRB releases final rule on conformance periods October 2011: Proposed interagency regulations for

implementation of Volcker Rule (excluding CFTC)

Still to come: 1st or 2nd Quarter 2012: Final regulations on Volcker Rule. July 21, 2012: Volcker Rule to take effect—with 2-year

conformance period. July 21, 2014: Across-the-board conformance period ends, but

extensions are available

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Summary of the Proposed Rules

76 Fed. Reg. 68846 (Nov. 7, 2011)

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Issuing Agencies

Compliance and Reporting Requirements Required compliance program that is “reasonably designed” to

ensure and monitor” compliance, and that is appropriate for the “size, scope and complexities” of the banking entity’s activities and business structure

Reporting and recordkeeping requirements

Key Definitions

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Proprietary Trading Prohibitions and Exceptions Definition of “proprietary trading” Implementation of major proprietary trading exceptions:

Underwriting Market-making Risk-mitigating hedging activities Trading “on behalf of” customers Trading in permitted instruments Trading by regulated insurance companies Trading outside of the United States

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Covered Fund Prohibitions and Exceptions Definition of “covered fund” Implementation of restrictions on owning/sponsoring covered

funds Implementation of major covered fund exceptions:

“Organizing and offering” a covered fund Investments in covered funds Permitted covered fund activities and investments

Limits on certain relationships with covered funds

Prudential Limits on Permitted Trading and Fund Activities

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Termination of Activities or Investments; Penalties

Conformance Period Provisions General carryover of existing conformance rules

Treatment of Nonbank Financial Institutions No specific rules proposed at this time

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Issuing Agencies

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Issuing Agencies

Banking agencies Federal Reserve Board Office of the Comptroller of the Currency Federal Deposit Insurance Corporation

Securities and Exchange Commission The SEC has joined with the banking agencies on the substantive

common rule proposals but separately is seeking comments on certain aspects of the proposed rules

Commodity Futures Trading Commission – Not yet The CFTC is one of the agencies that is directed to issue rules,

but it has not proposed rules as of now Speculation over reasons for CFTC inaction to date

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Compliance and Reporting Requirements

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Structure of Required Compliance Program The proposed rules would create compliance and reporting

requirements to assure that (i) covered banking entities comply with the substantive requirements of the Volcker Rule and implementing regulations, and (ii) the financial regulatory agencies can monitor and supervise such compliance

These requirements broadly include: A compliance program that is reasonably designed to assure and

monitor compliance with proprietary trading and covered fund activities and investments

Reporting and recordkeeping requirements for covered trading and covered fund activities

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Structure of Required Compliance Program Certain banking entities that are actively and substantially

engaged in trading activities would be subject to more stringent and detailed compliance and reporting requirements that are imposed on a tiered basis, depending on the quantitative level of these activities

All of these requirements, by all accounts, will be costly and burdensome for many banking entities to implement

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Compliance Program – Required Minimum Elements for all Banking Entities (Section 20)

Internal written policies and procedures System of internal controls Management framework that clearly delineates responsibility and

accountability for Volcker Rule compliance Independent testing of compliance program effectiveness Training for trading personnel/managers and other appropriate

personnel Making/keeping records sufficient to demonstrate compliance,

which must be provided to a banking entity’s regulatory agency on request and maintain for a period of not less than 5 years

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Compliance Program – Enhanced Requirements for Certain Banking Entities (Section 20 and Appendix C)

Affected banking entities (“Appendix C banking entities”) are: Those that engage in proprietary trading and have total

worldwide trading assets and liabilities of either (i) equal or greater than $1 billion, or (ii) 10% or more of total assets, measured on a average gross sum basis as determined on the last day of each of the four prior calendar quarters.

Those that invest in or have relationships with covered funds where (i) aggregate investments in covered funds, or (ii) average total assets of covered funds sponsored or advised by the banking entity, are equal or greater than $1 billion, measured as of the last day of each of the four prior calendar quarters

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Enhanced Requirements for Appendix C Banking Entities Significantly more detailed requirements for covered trading

activities, covered fund activities or investments Program requirements Internal policies and procedures Internal controls Accountability requirements Independent testing Training Recordkeeping

These requirements are similar but not identical for proprietary trading and covered fund activities (and therefore are discussed separately below)

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Compliance Program – Conditional Exclusion Conditional exclusion for banking entities “to the extent” not

engaged in “activities or investments prohibited or restricted” by the proprietary trading or covered fund rules

Existing compliance policies and procedures must be designed to prevent the banking entity from engaging in covered activities, and require a banking entity to develop the required compliance program before engaging in covered activities

Some questions regarding the practical impact and utility of this conditional exclusion

Trading in exempted instruments Investment portfolio purchases Impact of high risk activities/systemic risk requirements

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Key Global Definitions

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“Banking Entity” Generally tracks statutory definition, including fiduciary exclusion Excludes “organized/offered funds” and entities they control

“Covered Banking Entity” Separately defined by each proposing agency generally to include

banking entities under each agency’s respective regulatory and supervisory jurisdiction

“Resident of the United States” Broadly tracks parallel definition in SEC Regulation S, but is not

altogether identical to Regulation S definition

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“Derivative” Includes swaps and security-based swaps as defined in

Commodity Exchange Act and Securities Exchange Act, respectively, as further defined by CFTC and SEC under Dodd-Frank Act section 712

“Loan” Loan Lease Extension of credit Secured/unsecured receivable

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Proprietary Trading

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Proprietary Trading–Statute

Statutory Definitions “Proprietary trading” is defined as

engaging as principal for the trading account of the banking entity or nonbank financial company (NBFC)

in any transaction to purchase or sell, or otherwise acquire or dispose of, any security, any derivative, any contract of sale of a commodity for future delivery, any option on any such security, derivative, or contract, or “any other security or financial instrument” that the appropriate federal agencies may determine

“Trading account” is defined as: any account used for acquiring or taking positions principally for

the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements), or

any such other accounts specified by rule

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Proprietary Trading–Implementation Rules

The agencies’ proprietary trading rules consist of several key elements

• Key definitions• Application and elaboration of statutory prohibition• Application and elaboration of statutory exceptions• Detailed and elaborate compliance management, governance and

reporting requirements for banking entities that engage in proprietary trading

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Proprietary Trading Rules–Core Provisions

Key Rule Definitions• “Proprietary trading”: Engaging as principal for a trading account

in purchase/sale of covered financial positions• Agency activities and transactions for unaffiliated third parties

are excluded from the definition

• Covered financial position”: • Long, short, synthetic “or other” positions on: (i)

securities/options on securities; (ii) derivatives/options on derivatives; (iii) commodity futures

• Excludes: (i) loans, (ii) commodities, (iii) foreign exchange or currencies

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Key Rule Definitions• “Trading Account”: An account that acquires or takes a covered

financial position:• for (i) short-tem resale, (ii) price movement benefits, (iii)

arbitrage, or (iv) hedging of (i), (ii) or (iii).

• That is a market risk capital rule covered position, excluding positions in foreign exchange derivatives and commodity derivatives/futures, if the banking entity calculates such risk-based capital ratios

• For any purpose if account holder is a regulated securities/commodities firm

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Key Rule Definitions• Rebuttable trading account presumption: an account used to

acquire a covered financial position for 60 days or less, excluding covered positions acquired as market risk capital rule positions or acquired by regulated commodities/securities professionals (see below), is presumed to be a trading account, but that presumption is rebuttable based on the particular facts/circumstances

• Other trading account exceptions• Covered positions arising under qualified repo transactions• Covered positions arising under qualified securities lending and

borrowing transactions• Bona fide, documented liquidity management activities• Clearing activities of registered securities clearing firms or

derivatives clearing organizations

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Proprietary Trading Rules–Exceptions

Underwriting Activities and Requirements Required compliance and reporting program Limited to “securities” Must occur “solely” in connection with a “distribution” Limited to registered/exempt/qualified dealers Activities not to exceed customers’ “reasonable short term

demands” Activities must be designed to generate fee-based revenue not

based on price movements or hedging activities Compensation system cannot reward proprietary trading Key definitions: “underwriting” and “distribution”

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Market-Making Activities and Requirements Required compliance and reporting program Trading desk/unit must hold itself out as engaged in market-making

activities Exception is limited to registered/exempt/qualified/dealers Market-making activities are not to exceed customers’ “reasonable

short term demands” Activities must be designed to generate fee-based revenue not

based on price movements or hedging activities Compensation system cannot reward proprietary trading Hedging of permitted market-making positions is allowed See, Appendix B commentary on identification of permitted market-

making activities

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Market-Making Activities and Requirements Appendix B commentary on market-making activities Elements of permitted market-making activities

Primary purpose: financial intermediation Fee/commission spread revenues – not price movements Customer-facing and customer-related activity Absence of compensation incentives

Distinguishing permitted and prohibited activities Risk retention profile and management Revenue sources Revenues relative to risk Customer-facing activity Fees, commissions and spreads Compensation incentives

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Hedging Activities and Requirements Required compliance and reporting program Must hedge “specific risks” in connection with covered positions Must be reasonably correlated to underlying position risk based on

“facts and circumstances” Hedging position cannot create significant new financial exposures

not already present at outset of transaction Continuing review, monitoring and management of hedging

positions to assure (i) compliance with policies, (ii) maintenance of reasonable correlation and (iii) risk exposure mitigation

Compensation system cannot reward proprietary trading Hedging positions must be documented: purposes, risks hedged,

and level of organization establishing the hedge

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Customer Transactions and Requirements Banking entity must be acting as investment adviser, commodity

trading advisor, trustee or other fiduciary capacity Transactions must be for accounts of customers Customer(s) must have sole beneficial ownership of covered

positions Others types of transactions allowed:

Riskless principal transactions Separate account transactions by regulated insurance companies;

must relate to insurance policies issued and comply with applicable state insurance laws

General account transactions by regulated insurance companies; must comply with applicable state insurance laws

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Permitted Instruments and Requirements U.S. and agency obligations Ginnie, Fannie, Freddie, FHLB, Farmer Mac and Farm Credit Bank

obligations State and local government obligations General and limited obligations, including revenue bonds, are

permitted

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Non-U.S. Transactions and Requirements Eligibility limited to banking entities that are FBOs as defined under

the IBA and Regulation K, and other qualified foreign banking entities

Transaction must be conducted pursuant to BHCA section 4(c)(9) or 4(c)(13)

For FBOs this means compliance with Regulation K, Subpart B Asset/revenue/net income tests for other foreign banking entities

Transaction must take place “solely” outside the U.S. Banking entity effecting transaction cannot be a U.S. entity No U.S. resident may be a party to the transaction No banking entity personnel “directly” involved in transaction may

be “physically located” in the U.S. Execution must occur “wholly outside” of the U.S.

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Proprietary Trading–Compliance and Reporting Requirements

Specific Requirements for Certain Banking Entities (“Appendix A Banking Entities”)

All banking entities that have consolidated worldwide trading assets and liabilities equal to or greater than $1 billion, measured on an average gross sum basis as determined on the last day of each of the four prior calendar quarters, will be subject to detailed and extensive reporting and recordkeeping requirements for those trading activities (Section 7 and Appendix A requirements), depending on the nature and level of trading activity

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Proprietary Trading Rules–Compliance and Reporting Requirements

Specific Requirements for Appendix A Banking Entities These reporting and recordkeeping requirements are tiered as

follows: Banking entities that have consolidated worldwide trading assets

and liabilities equal to or greater than $1 billion but less than $5 billion will be required to maintain records and report on their market-making related activities

Banking entities that have consolidated worldwide trading assets and liabilities equal to or greater than $5 billion, however, will be required to maintain records and report on all covered trading activity

This information is required for each “trading unit” of the reporting

banking entity

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Specific Requirements for Appendix A Banking Entities Scope of reporting

$1-$5 billion banking entities: 8 data points for market making activities

$5+ banking entities: 17 data points for market-making activities, 5 data points for other permitted trading

Frequency of calculation and reporting Calculation: every trading day Reporting: monthly -- reports due 30 days after calendar month’s

end or as other requested by supervisory agency

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Specific Requirements for Appendix A Banking Entities Quantitative reporting and recordkeeping requirements

Risk management measurements Source-of-revenue measurements Revenue-relative-to-risk measurements Customer-facing activity measurements Payment of fees, commissions and spreads measurements

Further, all Appendix A banking entities are Appendix C banking entities (although not necessarily vice-versa), and therefore are subject to compliance management requirements specifically impacting their trading activities

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Proprietary Trading–Compliance and Reporting RequirementsAppendix C Trading Compliance Program Requirements Internal policies and procedures

Identification of trading accounts Identification of trading units and organizational structure Description of missions and strategies Trader mandates Description of risks and risk management processes Hedging policies and procedures Explanation of compliance Remediation of violations

Written internal controls Assure consistency with mission, strategy and risk mitigation Must address, at a minimum, (i) authorized risks, instruments

and products, (ii) risk limits, (iii) robust analysis and quantitative measurements, and (iv) surveillance of program effectiveness

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Proprietary Trading–Compliance and Reporting Requirements

Appendix C Trading Compliance Program Requirements Responsibility/accountability

Corporate governance Trader mandates Management procedures Business line managers Senior management responsibilities Board of directors/CEO responsibilities

Independent testing Not less than annually Evaluation of program adequacy/effectiveness, written policies

and procedures, internal controls and management procedures Training Recordkeeping

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Private Equity Funds and Hedge Funds

(Covered Funds)

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Covered Funds–Statute

Volcker Rule prohibits acquisitions of ownership interests in, and sponsorship of, private/hedge funds

“Private equity funds” and “hedge funds” are those funds exempt from the Investment Company Act of 1940 under ICA sections 3(c)(1) or 3(c)(7)

Regulatory agencies have authority to extend the private/hedge fund limitations to other types of funds

Permissible fund-related activities: Organizing/offering covered funds as part of a bona fide trust or

advisory business, and related de minimis investments Prime brokerage services Investments in SBICs and similar funds

The statutory limitations on high-risk positions and activities for proprietary trading also apply to permissible private/hedge fund activities

This is MoFo. 48

Covered Fund Rules–Core Provisions

Rules state that a banking entity may not, as principal, directly or indirectly acquire or retain any ownership interest or sponsor a covered fund

Key Definitions “Covered fund”

Funds exempt under ICA section 3(c)(1) or 3(c)(7) Commodity pool as defined in CEA section 1a(10) A non-US issuer that would be a covered fund were it organized

or offered under U.S. or state law or offered to U.S. residents “Any similar fund” as agencies may determine by rule

“Ownership interest” Any equity, partnership or similar interest in a covered fund Excludes qualifying carried interests

This is MoFo. 49

Covered Fund Rules–Core Provisions

Key Definitions “Prime brokerage”

One or more products or services provided by a banking entity to a fund such as: custody; clearance; securities borrowing or lending; trade execution; or financing, data, operational or portfolio management support

“Sponsor” Serve as GP, managing member/trustee/CPO of covered fund Ability to select/control directors/similar officials of covered fund Share a name/name variation with a covered fund

“Trustee” Excludes nondiscretionary trustees and directed trustees as

defined in ERISA Includes persons with investment discretion controlling a

nondiscretionary/directed trustee

This is MoFo. 50

Covered Funds–Exceptions

Bona Fide Fiduciary Services – Organize/Offer A banking entity that provides bona fide trust, fiduciary, or

investment advisory services may organize and offer a covered fund, if the banking entity: Offers interests in covered fund only in connection with providing bona fide trust

or related services to customers Retains only a de minimis investment in fund Observes “super 23A” and section 23B restrictions on transactions with fund Does not, directly or indirectly, support fund obligations or performance Does not share a name (or derivation) with fund, and fund does not use the

word “bank” in its name Does not permit any director or employee of the banking entity to have an

economic interest in fund, except persons “directly engaged” in providing investment advisory services to fund

Discloses to investors that fund losses are not borne by the banking entity

This is MoFo. 51


Organize/Offer Exception – De Minimis Investments A banking entity that “organizes and offers” a covered fund as part

its trust, fiduciary, or investment advisory services, may invest in the fund under three broad conditions:

The banking entity seeks unaffiliated investors The start-up investment in a fund is unrestricted but within one year

of the start date, the banking entity’s investments shall not exceed more than 3% of the total ownership interests in the fund

The aggregate of investments in all such funds does not exceed 3% of the banking entity’s Tier 1 capital

This is MoFo. 52


Organize/Offer Exception – De Minimis Investments Attribution rules

Controlled investments – full attribution Non-controlled investments – pro rata attribution

Calculation of capital/investment ceilings: Single fund rule -- greater of % equity value of investment or %

ownership interest Certain parallel investments must be included Calculations must be consistent with methodology of each investment

fund Aggregate investments -- sum of values of each investment

Rules require deductions of qualifying investments from the banking entity’s primary (Tier 1) capital

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Funds–Compliance and Reporting Requirements

Specific covered fund requirements apply to banking entities that are subject to enhanced compliance program requirements (Appendix C requirements)

Internal policies and procedures Identification of covered funds Identification of asset management units/organization Description of sponsorship activities Description of investment activities Remediation of violations

Written internal controls Investment monitoring Relationship monitoring Surveillance of program effectiveness

This is MoFo. 54

Funds–Compliance and Reporting Requirements

Appendix C compliance program requirements Responsibility/accountability

Corporate governance Management procedures Business line managers Senior management responsibilities Board of directors/CEO responsibilities

Independent testing Not less than annually Evaluation of program adequacy/effectiveness, written policies

and procedures, internal controls and management procedures Training Recordkeeping

This is MoFo. 55

Funds–Other Permissible Activities

Investments in SBICs and related investments Related investments include funds designed primarily to promote

public welfare, or qualified IRC section 47/state historic tax credit investments

Risk-mitigating hedging activities Investments made in connection with obligations/liabilities of the

banking entity (i) taken when acting for a customer to facilitate customer exposure to profits/losses of covered fund, or (ii) directly connected to compensation of employee directly provided advisory services to a covered fund

Such investments are designed to reduce specific risks to the banking entity related to such obligations/liabilities

This is MoFo. 56


Foreign investments/sponsorship Investment in or sponsorship of a covered fund by a banking entity

solely outside of the United States if: • Banking entity not directly/indirectly controlled by U.S. banking

entity• Activity is conducted pursuant to BHCA Section 4(c)(9) or 4(c)(13) • Interests in the fund are not offered or sold to a U.S. resident• Activity occurs solely outside of the U.S.

• BHCA Section 4(c)(9) or 4(c)(13) activity Same criteria as those used for permitted non-U.S. proprietary

trading

Solely outside the U.S. No U.S. entity, U.S. legal/physical presence, or offer/sale to U.S.

resident

This is MoFo. 57


Loan Securitizations Allows owner/sponsorship of covered fund that is an issuer of

asset-backed securities, assets of which are solely comprised of: Loans Directly related contractual rights or assets Interest rate and foreign exchange derivatives that materially relate

to terms of underlying loans/contractual rights or assets and are used for hedging purposes with respect to issuer

Bank-owned life insurance (BOLI) separate accounts

This is MoFo. 58


Other Permitted Covered Funds/Activities Joint ventures/operating company investments Acquisition vehicles “Securitizer” and “originator” credit risk retentions of asset-backed

securities issuers under Securities Exchange Act section 15G Liquidity management subsidiaries Qualified ABS issuers Covered fund ownership interests acquired DPC, subject to

compliance with agency disposition periods Covered fund ownership interests acquired/held in compliance with

Federal Reserve Board’s Volcker Rule conformance periods

This is MoFo. 59

Covered Funds–Limits on Banking Entity Relationships

Absolute prohibition on banking entity Section 23A covered transactions with covered funds

“Super 23A” prohibition applies to any covered fund to which a banking entity acts as investment manager, investment adviser, or sponsor

Super 23A does not prohibit otherwise-permitted acquisitions or retentions of covered fund ownership interests under the organize/offer or other covered fund exceptions

Prime brokerage transactions with covered funds are conditionally exempted

But, limited to covered funds in which a covered fund managed, sponsored or advised by the banking entity has taken an ownership interest

This is MoFo. 60

Covered Funds–Limits on Banking Entity Relationships

Application of Federal Reserve Act Section 23B to banking entity relationships with covered funds

Applies to any covered fund to which a banking entity acts as investment manager, investment adviser, or sponsor

Banking entity and its affiliates are treated as a “member bank” for Section 23B purposes

Permitted prime brokerage transactions are subject to Section 23B limitations

This is MoFo. 61

Covered Activities – Prudential Limitations

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Covered Activities–Prudential Limitations

Otherwise permissible proprietary trading or fund ownership/sponsorship activity is forbidden if it would:

Result in a material conflict of interest between the banking entity and its clients

Result, directly or indirectly, in a material exposure for the banking entity to high-risk assets or high-risk trading strategies

Pose a threat to the safety and soundness of the banking entity

Pose a threat to the financial stability of the U.S.

This is MoFo. 63


Material Conflicts of Interest: Activities or transactions that would involve or result in the banking

entity’s interests being “materially adverse” to client, customer or counterparty interests, unless:

Banking entity makes “clear, timely and effective disclosure” of conflict and

Disclosure is made “explicitly and effectively” in a manner that allows client/customer/counterparty to “negate or substantially negate” any materially adverse effect

or Banking entity has information barriers that are reduced to writing in

specified written policies and procedures. Compliant information barriers, however, do not permit transactions creating conflicts that have materially adverse effect on client/customer/counterparty

This is MoFo. 64


High-Risk Asset: Asset or group of related assets that if held by banking entity would significantly increase the likelihood that the banking entity would incur a substantial financial loss or would fail

High-Risk Trading Strategy: Trading strategy that if conducted by banking entity would significantly increase the likelihood that the banking entity would incur a substantial financial loss or would fail

Threat to the safety and soundness of the banking entity

Threat to the financial stability of the U.S.

This is MoFo. 65


Financial agencies may require banking entities that violate or seek to evade requirements of Volcker Rule or implementing regulations to restrict, limit or terminate activity or dispose of investment

Such action may be taken upon finding of “reasonable cause” upon notice and opportunity for a hearing

Enforcement powers and remedies of FDI Act section 8 (12 USC 1818) presumably are available to the banking agencies

Ditto for SEC under the Securities Exchange Act?

This is MoFo. 66

Effective Dates and Conformance Periods

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Effective Dates and Conformance Periods

Volcker Rule regulations will take effect not later than July 21, 2012

FRB’s prior rule on conformance deadlines would be relocated without material changes into the general regulations; changes to harmonize conformance rule definitions with general regulations will be made

Banking entities will have until July 21, 2014, to bring existing activities into compliance

Three one-year extensions are available if FRB determines that extension is consistent with purposes of the Volcker Rule and would not be detrimental to the public interest.

FRB may grant single five-year extension for illiquid funds owned as of May 1, 2010.

This is MoFo. 68

Impact Issues

This is MoFo. 69

Impact Issues

Asset-liability management activities Investment portfolio management Hedging activities: identification and correlation issues

Investment banking activities Public distributions Private placements Corporate finance and advisory activities Market-making and dealing activities

Private fund activities Fund-of-fund activities Non-U.S. funds Provision of fund services and financial support

This is MoFo. 70

Impact Issues

Foreign banking entities Differentiating U.S. and non-U.S. activities

Derivatives activities

Compliance infrastructure requirements and demands Senior management and board responsibilities Accountability Level of detail IT/systems requirements Integration with existing compliance systems Human resources needed to implement

Non-bank financial institutions

This is MoFo. 71

Contact Information

Charles M. Horn Oliver I. Ireland

(202) 887-1555 (202) 877-1614

[email protected] [email protected]

Dwight C. Smith Barbara R. Mendelson

(202) 887-1562 (212) 468-8118


David H. Kaufman Anna T. Pinedo

(212) 468-8237 (212) 468-8179


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