The Securities and Exchange Commission has added another round of supplemental guidance to its growing list of “frequently asked questions" regarding Volcker rule compliance. The latest updates, released on Sept. 25, address CEO attestation and compliance program requirements for market making-related activities.
A summary of the questions and answers follows.
May a bank’s compliance program for market making-related activities include objective factors on which a trading desk may reasonably rely to determine whether a security is issued by a covered fund? Also, can a market maker meet its compliance program requirements by making use of a shared utility or third party service provider to identify whether a security is issued by a covered fund?
For purposes of meeting the final rule’s exemption for market-making, a reasonably designed compliance program for a trading desk engaged in market making-related activity may include objective factors on which the trading desk may reasonably rely to determine whether a security is issued by a covered fund. As an example, an objective factor might include whether the securities of the issuer were offered in transactions registered under the Securities Act. Objective factors would not be considered part of a reasonably designed compliance program if the banking entity designed or used them to evade rule requirements.
A “reasonably designed” compliance program for a trading desk engaged in market making-related activity also may permit the use of a shared utility or third party service provider to identify whether a security is issued by a covered fund.
The banking entity’s reliance on objective factors, a shared utility, or a third party service provider must be subject to independent testing and audit requirements applicable to the banking entity’s compliance program. If, at any time, the banking entity discovers it holds an ownership interest in a covered fund in violation of the final rule, it must promptly dispose of the interest or otherwise conform it to the requirements of the final rule.
Under the final rule, banking entities subject to the enhanced minimum standards for compliance programs must provide an annual CEO attestation regarding the banking entity’s compliance program. When must the first annual CEO attestation be provided to the relevant agency?
The final rule provides that, based on a review by the CEO of the banking entity, he or she must, annually, attest in writing to the relevant agency that it has in place processes to establish, maintain, enforce, review, test, and modify the required compliance program. Banking entities must meet the compliance program requirements of the final rule by the end of the conformance period, which is currently July 21, 2015. The CEO attestation should be submitted no later than March 31, 2016. Thereafter, banking entities should provide the attestation annually within one year of its prior attestation.