Five federal regulatory agencies Thursday proposed changes to the Volcker rule that would 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 proposed changes to the rule, which took three years to be approved, after 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 regulators Thursday said it has created compliance uncertainty and imposed limits on certain banking services and activities that it did not intend to restrict.
In 2019, the same regulators provided relief to financial institutions by adopting changes that tailored the rule's compliance requirements based on the size of a firm's trading assets and liabilities, with the most stringent requirements applied to banking entities with the most trading activity, among other changes.
On Thursday, those regulators proposed several ways to "streamline" the covered fund-related portion of the Volcker rule, according to a summary prepared by Fed staff, including:
- 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.
- Clarifying that credit exposures to a covered fund would generally not constitute fund ownership interests.
- Simplifying existing provisions related to foreign public funds, loan securitizations and small business investment companies.
Fed Chairman Jerome Powell, in support of the proposal, said regulators "have learned that a simpler, clearer approach to implementing the rule makes it easier for both banks and regulators to carry out the intent of the rule."
SEC Chairman Jay Clayton, who also supported the proposal, said in prepared remarks that the proposed amendments could "facilitate capital formation, improve competition and market efficiency along a number of dimensions, and do so without increasing risks to investors.
His colleague at the SEC, Commissioner Allison Herren Lee, disagreed. "As with the rule last fall, this proposal replaces clear, common sense restrictions with just the hope that banks will self-police and remain diligent in identifying and mitigating their own risks — an expectation that flies in the face of experience," she said in a statement.
On Capitol Hill, Mike Crapo, R-Idaho, chairman of the Senate Banking Committee, applauded the proposal. "These changes are necessary to improve market liquidity and preserve access to diverse sources of capital for businesses," he said in a statement.
Comments on the proposal will be accepted until April 1.
