Volcker Rule: Agencies Propose to Implement Community Bank Exemption and Revised Name-Sharing Rule

Community Bank and Small Banking Organization Exclusion

The Volcker Rule restricts the ability of a “banking entity” to engage in proprietary trading or to hold ownership interests in, sponsor or have certain other relationships with covered funds. The term “banking entity” is broadly defined. It includes any (i) insured depository institution; (ii) company that controls an insured depository institution; (iii) company treated as a bank holding company for purposes of Section 8 of the International Banking Act of 1978 (an IBA-BHC);⁶ and (iv) any affiliate or subsidiary of any of those entities. There are specified exclusions from the definition, both in the statute and in the existing regulations.

The EGRRCPA modified the statutory definition of “banking entity” by excluding from the definition certain insured depository institutions and affiliates thereof. The exclusion (the Community Bank Exclusion) is available if an insured depository institution and each company that directly or indirectly controls that insured depository institution each meet two requirements. First, neither the insured depository institution nor any company that directly or indirectly controls it may have more than $10 billion in total consolidated assets. Second, neither the insured depository institution nor any company that directly or indirectly controls it may have total trading assets and trading liabilities that exceed 5 percent of such entity’s total consolidated assets. The Community Bank Exclusion is not available to IBA-BHCs.

Given that the definitional change was statutory, the Community Bank Exclusion has been available to qualifying institutions since the EGRRCPA’s enactment. The NPR thus generally seeks only to conform existing regulations with the language of the EGRRCPA by amending the definition of “insured depository institution” in the regulations.

Amendments to the Name-Sharing Restrictions

The Volcker Rule restricts the ability of a banking entity to share a name with a covered fund in two ways. First, sharing a name (or a variation of a name) with a covered fund is one prong of the definition of “sponsor,” and thus it is covered by the Volcker Rule’s restrictions on the ability of a banking entity to sponsor a covered fund. Second, the regulations include an exemption that allows a banking entity to organize and offer a covered fund, subject to certain conditions, in connection with the banking entity’s asset management and fiduciary activities. However, a banking entity will not qualify for the exemption if the banking entity and the covered fund share a name or a variation of a name.

The EGRRCPA amended the statute to permit a banking entity that is an investment adviser to a covered fund (an Investment Adviser Banking Entity) to share a name, or a variation of a name, with such fund if certain criteria are met. Those criteria are that the Investment Adviser Banking Entity may not (i) be an insured depository institution, a company that controls an insured depository institution or an IBA-BHC; (ii) share a name, or a variation of a name, with an insured depository institution, any company that controls an insured depository institution, or an IBA-BHC; or (iii) have a name that contains the word “bank.”

If adopted, the NPR would conform the existing Volcker Rule regulations to the EGRRCPA changes. The NPR proposes to amend the definition of “sponsor” in the regulations to conform it to the statutory definition as revised by the EGRRCPA. The NPR would also amend the asset management exemption accordingly. (The NPR would not need to alter the current regulatory prohibition on a banking entity’s having a name that contains the word “bank,” as the EGRRCPA simply codified the existing regulatory prohibition in that regard.)

The changes proposed in the NPR (and indeed required by the EGRRCPA) will be helpful only to those Investment Adviser Banking Entities that currently do not share a name (or a variation thereof) with an insured depository institution or a company that controls an insured depository institution. Those Investment Adviser Banking Entities that do share a name (or a variation thereof) with such entities have been (and will continue to be) prohibited from marketing their covered funds using their own names (or any variation thereof). To rely on the relief, any such Investment Adviser Banking Entity would need to change its name to one that is not associated with the larger organization. The renamed Investment Adviser Banking Entity would then again be permitted to organize and offer its funds using its own name (subject to the other conditions of the Volcker Rule that may apply).

¹ Section 13 of the Bank Holding Company Act of 1956 (BHCA), known as the Volcker Rule, was added to the BHCA by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

² The Agencies are the Office of the Comptroller of the Currency (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Securities and Exchange Commission (SEC); and Commodity Futures Trading Commission (CFTC).

³ The Agencies published lengthy supplementary information when they adopted the final rule implementing the Volcker Rule. See 79 Fed. Reg. 5536 (Jan. 31, 2014) (Board, FDIC, OCC and SEC); 79 Fed. Reg. 5808 (Jan. 31, 2014) (CFTC).

⁴ Pub. L. No. 115-174 (2018).

⁵ Please refer to our Client Update describing that proposal for additional information: https://www.sidley.com/en/insights/newsupdates/2018/06/volcker-rulechanges-proposed-by-us-federal-agencies.

⁶ 12 U.S.C. § 3101 et seq.