Five federal regulatory agencies Thursday finalized changes to the Volcker rule that loosen restrictions on banks investing in or sponsoring hedge funds and private equity funds.
The Federal Reserve, Securities and Exchange Commission, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and Commodity Futures Trading Commission collectively finalized changes to the rule, which took three years to be approved, following passage of the 2010 Dodd-Frank Act.
The Volcker rule prohibits federally backed financial institutions from engaging in proprietary trading or having interests in private equity or hedge funds. But in proposing the rule in January, regulators said it had created compliance uncertainty and imposed limits on certain banking services and activities that it did not intend to restrict.
Regulators said the rule will streamline the covered fund-related portion of the Volcker rule, by, among other changes, clarifying that credit exposures to a covered fund would generally not constitute fund ownership interests; permitting certain low-risk transactions, including intraday credit and payment, clearing and settlement transactions, between a banking entity and covered funds for which the banking entity serves as investment adviser or sponsor; simplifying existing provisions related to foreign public funds, loan securitizations and small business investment companies.
Randal Quarles, Federal Reserve vice chairman, said in a statement that the rule simply allows banking entities to engage in already permitted activities, such as venture capital investment, through a fund structure.
"While these activities are appropriate generally, ensuring the ability of the financial sector to support the real economy through the broadest means possible under the law is particularly important today," Mr. Quarles said. "And to mitigate any risks present with activity through a fund, the final rule does not allow banking entities to engage in proprietary trading through a fund structure, restricts a banking entity from bailing out the funds it sponsors, limits conflicts of interest between the banking entity and fund, and of course, the activity remains subject to robust capital charges even if it is conducted through a fund structure."
At the SEC, two Republican commissioners, Hester M. Peirce and Elad L. Roisman, said in a joint statement that the rule could have went further based on comments from the public. They said commenters supported excluding long-term investment vehicles from the definition of covered funds in order to facilitate economic growth.
"The recommendation today does not take up this suggestion," Ms. Peirce and Mr. Roisman said. "While we understand the complexities of inter-agency rule-making efforts, and the compromises they entail, we will continue to consider the treatment of long-term investment vehicles and remain open to hearing any additional suggestions for further improving the regulations implementing the Volcker rule."
Their colleague, SEC commissioner Allison Herren Lee, a Democrat, dissented. She said the final rule "will continue to loosen safeguards put in place after the last financial crisis to protect taxpayers from risky bets made by banks. We do this precisely as the global economy enters an even greater, more foreboding crisis of as yet unknown length and severity. I cannot support the decision to proceed in the face of tremendous uncertainty regarding the evolving effects of the current crisis, and without even attempting to analyze or quantify its current impact."
The rule takes effect Oct. 1.
