Despite pushback from some regulators and Democrats in Congress, five federal regulatory agencies on Thursday finalized a roll back to the Volcker rule prohibition that will allow banks—in certain circumstances—to invest or sponsor hedge funds and private equity funds, also known as covered funds.
The Securities and Exchange Commission (SEC) announced the change in a press release, joined by the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and Federal Reserve Board.
The changes take effect Oct. 1.
The Volcker rule contains two main provisions. It “prohibits insured depository institutions, bank holding companies, and their subsidiaries or affiliates (banking entities) from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity’s own account,” and also “prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds.”
Adopted in 2015 as an amendment to the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, the Volcker rule also required banks and financial institutions to establish an internal compliance program designed to ensure and monitor compliance with the statute’s prohibitions and restrictions.
Last year, the five agencies responsible for implementing the rule eased restrictions on proprietary trading by banks.
Now they have eased restrictions on the rule’s prohibition on investing or sponsoring in hedge funds and private equity funds. The changes include “streamlining the covered funds portion of the rule; addressing the extraterritorial treatment of certain foreign funds; and permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker rule was intended to address,” the press release said.
SEC Chairman Jay Clayton said in a January 2020 statement that the changes would “facilitate capital formation, improve competition and market efficiency along a number of dimensions, and do so without increasing risks to investors.” Two other SEC commissioners, Elad Roisman and Hester Peirce, favored deleting the Volcker rule entirely and said the changes represented a compromise.
Critics, including SEC Commissioner Allison Herren Lee, said the changes effectively repeal the Volker rule.
Referring to the coronavirus pandemic, CFTC Commissioner Dan Berkovitz said in a statement released Thursday: ”In the middle of this latest shock to our financial system, we should not be rushing out a final rule that permits greater risk taking by banks. Rather, we should take stock of the data available to us, and make carefully reasoned, incremental changes that are consistent with the Congressional intent for the Volcker rule.”
House Financial Services Committee Chair Maxine Waters (D-Calif.) accused regulators in February of “working overtime to weaken a regulation” that will allow “banks to gamble with taxpayer money.”