Alert January 14, 2014

Five Federal Agencies Adopt Interim Rule Providing Relief from the Volcker Rule with Respect to Collateralized Debt Obligations that Hold Trust Preferred Securities

The Federal Reserve Board, the OCC, the FDIC, the SEC and the CFTC (collectively, the “Agencies”) adopted an interim final rule (the “Interim Rule”) that provides relief from certain requirements of the Volcker rule for banking entities that hold investments in or that have sponsored issuers of collateralized debt obligations (“CDOs”) backed by trust preferred securities (“TruPS”).  With limited exceptions, the final Volcker rule implementing regulation adopted by the Agencies on December 10, 2013 (the “Final Rule”) prohibits banking entities from acquiring or retaining an ownership interest in or sponsoring a covered fund.  The definition of covered fund generally includes pooled investment vehicles that rely upon either Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act to avoid being treated as an investment company but that do not qualify for another exemption or exclusion under the Investment Company Act or the Final Rule, including CDOs that invest in TruPS.  Notwithstanding the prohibition on sponsoring or investment in covered funds, the Interim Rule permits a banking entity to retain an ownership interest in or act as sponsor of an issuer if (1) the issuer was established, and the ownership interest was issued before, May 19, 2010, (2) the banking entity reasonably believes that the proceeds received by the issuer were invested primarily in certain qualifying TruPS collateral, and (3) the banking entity acquired the interest on or before December 10, 2013 (or acquired such interest in connection with a merger or acquisition of a banking entity that acquired the interest on or before December 10, 2013).  For purposes of the Interim Rule, qualifying TruPS collateral refers to TruPS and subordinated debt instruments issued prior to May 19, 2010 by a depository institution holding company that, as of the end of any reporting period within 12 months immediately preceding the issuance of such TruPS or subordinated debt instrument, had total consolidated assets of less than $15 billion or was issued prior to May 19, 2010 by a mutual holding company.  The May 19, 2010 date refers to the grandfathering date in Section 171 of the Dodd-Frank Act—also known as the Collins Amendment—for TruPS issued by certain depository  institution holding companies with total consolidated assets of less than $15 billion as of December 31, 2009 and by mutual holding companies established as of May 19, 2010.  The Agencies explained that the requirement in the Interim Rule that an issuer have “invested primarily” in qualifying TruPS collateral “is intended to cover those securitization vehicles that have invested a majority of their offering proceeds in” qualifying TruPS collateral.  The Interim Rule also clarifies that a banking entity may act as a market maker for an issuer that meets the requirements described above.  The Interim Rule does not affect the status of collateralized loan obligations that are treated as covered funds under the Final Rule.  The Interim Rule will become effective on April 1, 2014, which is the effective date of the Final Rule.  Interested parties may submit comments to the Agencies for 30 days after the Interim Rule is published in the Federal Register.