[House Report 115-621]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-621
======================================================================
VOLCKER RULE REGULATORY HARMONIZATION ACT
_______
April 5, 2018.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4790]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4790) to amend the Volcker rule to give the
Board of Governors of the Federal Reserve System sole
rulemaking authority, to exclude community banks from the
requirements of the Volcker rule, and for other purposes,
having considered the same, report favorably thereon with an
amendment and recommend that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Volcker Rule Regulatory Harmonization
Act''.
SEC. 2. RULEMAKING AUTHORITY UNDER THE VOLCKER RULE.
(a) In General.--Paragraph (2) of section 13(b) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1851(b)(2)) is amended to read as
follows:
``(2) Rulemaking.--
``(A) In general.--The Board may, as appropriate,
consult with the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Securities
and Exchange Commission, or the Commodity Futures
Trading Commission to adopt rules or guidance to carry
out this section, as provided in subparagraph (B).
``(B) Rulemaking requirements.--In adopting a rule or
guidance under subparagraph (A), the Board--
``(i) shall consider the findings of the
report required in paragraph (1) and, as
appropriate, subsequent reports;
``(ii) shall assure, to the extent possible,
that such rule or guidance provide for
consistent application and implementation of
the applicable provisions of this section to
avoid providing advantages or imposing
disadvantages to the companies affected by this
subsection and to protect the safety and
soundness of banking entities and nonbank
financial companies supervised by the Board;
and
``(iii) shall include requirements to ensure
compliance with this section, such as
requirements regarding internal controls and
recordkeeping.
``(C) Authority.--The Board shall have sole authority
to issue and amend rules under this section after the
date of the enactment of this paragraph.
``(D) Conforming authority.--
``(i) Continuity of regulations.--Any rules
or guidance issued under this section prior to
the date of enactment of this paragraph shall
continue in effect until the Board issues a
successor rule or guidance, or amends such rule
or guidance, pursuant to subparagraph (C).
``(ii) Applicable guidance.--In performing
examinations or other supervisory duties, the
appropriate Federal banking agencies, the
Securities and Exchange Commission, and the
Commodity Futures Trading Commission, as
appropriate, shall update any applicable
policies and procedures to ensure that such
policies and procedures are consistent (to the
extent practicable) with any rules or guidance
issued pursuant to subparagraph (C).''.
(b) Conforming Amendments.--Section 13 of the Bank Holding Company
Act of 1956 (12 U.S.C. 1851) is amended--
(1) by striking ``the appropriate Federal banking agencies,
the Securities and Exchange Commission, and the Commodity
Futures Trading Commission,'' each place it appears and
inserting ``the Board'';
(2) by striking ``appropriate Federal banking agencies, the
Securities and Exchange Commission, and the Commodity Futures
Trading Commission'' each place it appears and inserting
``Board'';
(3) in subsection (c)(5), by striking ``Notwithstanding
paragraph (2)'' and all that follows through ``provided in
subsection (b)(2),'' and inserting ``The Board shall have the
authority''; and
(4) in subsection (d)(1)--
(A) in subparagraph (F)(ii)--
(i) by striking ``the appropriate Federal
banking agencies''' and inserting ``the
Board''; and
(ii) by striking ``have not jointly'' and
inserting ``has not''; and
(B) in subparagraph (G)(viii), by striking
``appropriate Federal banking agencies, the Securities
and Exchange Commission, or the Commodity Futures
Trading Commission,'' and inserting ``Board,''.
SEC. 3. ENFORCEMENT; ANTI-EVASION.
(a) In General.--Subsection (e) of section 13 of the Bank Holding
Company Act of 1956 (12 U.S.C. 1851(e)) is amended to read as follows:
``(e) Enforcement; Anti-evasion.--
``(1) Appropriate federal banking agency.--Notwithstanding
any other provision of law except for any rules or guidance
issued under subsection (b)(2), whenever the appropriate
Federal banking agency has reasonable cause to believe that a
banking entity or nonbank financial company supervised by the
Board has made an investment or engaged in an activity in a
manner that either violates the restrictions under this
section, or that functions as an evasion of the requirements of
this section (including through an abuse of any permitted
activity), such appropriate Federal banking agency shall order,
after due notice and opportunity for hearing, the banking
entity or nonbank financial company supervised by the Board to
terminate the activity and, as relevant, dispose of the
investment.
``(2) Securities and exchange commission and commodity
futures trading commission.--
``(A) In general.--Notwithstanding any other
provision of law except for any rules or guidance
issued under subsection (b)(2), whenever the Securities
and Exchange Commission or the Commodity Futures
Trading Commission, as appropriate, has reasonable
cause to believe that a covered nonbank financial
company for which the respective agency is the primary
Federal regulator has made an investment or engaged in
an activity in a manner that either violates the
restrictions under this section, or that functions as
an evasion of the requirements of this section
(including through an abuse of any permitted activity),
the Securities and Exchange Commission or the Commodity
Futures Trading Commission, as appropriate, shall
order, after due notice and opportunity for hearing,
the covered nonbank financial company to terminate the
activity and, as relevant, dispose of the investment.
``(B) Covered nonbank financial company defined.--In
this paragraph, the term `covered nonbank financial
company' means a nonbank financial company (as defined
in section 102 of the Financial Stability Act of 2010)
supervised by the Securities and Exchange Commission or
the Commodity Futures Trading Commission, as
appropriate.''.
(b) Rule of Construction.--Nothing in this section shall be construed
to abrogate, reduce, or eliminate the backup authority of the Federal
Deposit Insurance Corporation authority under the Dodd-Frank Wall
Street Reform and Consumer Protection Act (12 U.S.C. 5301 et seq.), the
Federal Deposit Insurance Act (12 U.S.C. 1811), or Federal Deposit
Insurance Corporation Improvement Act of 1991.
SEC. 4. EXCLUSION OF COMMUNITY BANKS FROM VOLCKER RULE.
Section 13(h)(1) of the Bank Holding Company Act of 1956 (12 U.S.C.
1851(h)(1)) is amended--
(1) in subparagraph (D), by redesignating clauses (i) and
(ii) as subclauses (I) and (II), respectively, and adjusting
the margins accordingly;
(2) by redesignating subparagraphs (A), (B), (C), and (D) as
clauses (i), (ii), (iii), and (iv), respectively, and adjusting
the margins accordingly;
(3) in the matter preceding clause (i), as so redesignated,
in the second sentence, by striking ``institution that
functions solely in a trust or fiduciary capacity, if--'' and
inserting the following: ``institution--
``(A) that functions solely in a trust or fiduciary
capacity, if--'';
(4) in clause (iv)(II), as so redesignated, by striking the
period at the end and inserting ``; or''; and
(5) by adding at the end the following:
``(B) that does not have and is not controlled by a
company that has--
``(i) more than $10,000,000,000 in total
consolidated assets; and
``(ii) total trading assets and trading
liabilities, as reported on the most recent
applicable regulatory filing filed by the
institution, that are more than 5 percent of
total consolidated assets.''.
Purpose and Summary
On January 12, 2018, Representative French Hill introduced
H.R. 4790, the ``Volcker Rule Regulatory Harmonization Act,''
to streamline the regulatory authority established by Section
619 of the Dodd-Frank Act, also known as the Volcker Rule, and
provide community banks under $10 billion with an exclusion
related to the Volcker Rule compliance obligations.
More specifically, H.R. 4790, as modified by an amendment
in the nature of a substitute offered by Representative Bill
Foster and accepted by Representative Hill, achieves these
objectives by amending Section 619 of the Dodd-Frank Act such
that the Board of Governors of the Federal Reserve (Federal
Reserve) has exclusive rulemaking authority and the primary
Federal regulator for each entity required to comply with the
rule has sole examination and enforcement authority over that
entity. The legislation also excludes community banks from
Volcker Rule compliance if they do not have and are not
controlled by an entity with $10 billion or more in total
consolidated assets and total trading assets and trading
liabilities that are more than five percent of total
consolidated assets.
Background and Need for Legislation
The goal of H.R. 4790 is to enhance regulatory clarity and
certainty as well as reduce burdensome and duplicative
compliance costs associated with Section 619 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Pub. L. No.
111-203)--popularly known as the ``Volcker Rule'' after its
chief proponent, former Federal Reserve Board Chairman Paul
Volcker.
The Volcker Rule generally prohibits U.S. bank holding
companies and their affiliates from engaging in ``proprietary
trading'' and from sponsoring hedge funds and private equity
funds. In its design and implementation, however, the Volcker
Rule far overshot the mark and has created an extraordinarily
complex and burdensome compliance regime due to several
factors, including: the scope of firms subject to the rule's
prohibitions, the number of regulators charged with
enforcement, ambiguous rules and definitions, and the extensive
compliance programs that the rule requires firms to adopt. The
result has chilled market-making functions necessary to ensure
a healthy level of market liquidity and hedging activity to
mitigate risk.
Banks play an extremely important role in U.S. financial
markets by buying and selling securities on behalf of their
customers, also known as ``market making.'' Market making is
crucial to the modern financial system, in which companies
raise funds by selling equity, bonds, notes, and commercial
paper. By acting as intermediaries between buyers and sellers,
banks hold prices down, maintain tight trading spreads and
facilitate continuous markets. Without market makers, buyers
and sellers would have to find each other, making transactions
both more costly and less frequent. Corporations that issue
debt to pay for capital investments, invest in research and
development, meet payroll, or hire new workers depend on market
makers to hold down the cost of credit.
Market makers also hold down the cost of credit for
consumers: credit card debt and mortgages are often financed by
being bundled into securities, which are then bought and sold
in the capital markets. By acting as a market maker for these
kinds of securities, banks make it cheaper and easier for
consumers to use their credit cards or obtain mortgages.
Savers--through large pension funds, mutual funds, and
insurance companies--also depend on the willingness of market
makers to buy and sell securities. These institutional
investors cannot ``save'' their cash at banks as small
depositors do, and they must be able to quickly meet calls for
cash from their investors. The market-making activities of
banks permit these firms to ``save'' cash by purchasing
financial assets and ``withdraw'' cash by selling those assets.
This ability to ``save'' and ``withdraw'' in turn benefits the
small investors that are the clients of these financial firms.
The drafters of the Volcker Rule acknowledged the key role
that market-making plays in ensuring deep, liquid capital
markets, and as a result attempted to exempt market-making
activities from prohibition on proprietary trading. But the
final rules implementing the Volcker Rule make it difficult for
banks to buy or sell securities for their own inventory in
anticipation of client demand because managing inventory can
look like ``proprietary trading''--potentially subjecting the
firm to regulatory sanctions and monetary penalties. The
inevitable result of this uncertainty is a reduction of
liquidity in crucial market sectors--including the corporate
debt market--which has the perverse effect of making the
financial system less resilient and more vulnerable to
destabilizing events like the one that the Dodd-Frank was
supposed to prevent.
The economic consequences of a sharp reduction in market
liquidity--where market participants lose the ability to buy or
sell securities quickly at a given price--cannot be overstated.
In addition to higher costs for corporations and consumers, the
value of assets held by large pension funds, mutual funds, and
insurance companies--assets which represent the savings of
millions of small investors--will decline as those assets
become harder to trade, making those investors worse off. The
lack of liquidity also means that financial markets have less
capacity to deal with shocks and will be more likely to seize
up in a panic, just as they did in the 2008 financial crisis.
Reduced liquidity in the bond markets amplifies volatility when
prices begin to decline. Rather than making markets more
stable, then, the new regulations have made them more brittle.
H.R. 4790 represents an important first step to address the
unintended and negative consequences of the Volcker Rule by
streamlining the rulemaking authority with the Federal Reserve,
consolidating examination and enforcement authority into a
single, primary regulator, and excluding from the rule
community banks under $10 billion in consolidated assets and
with trading assets and liability less than five percent.
Outside of full repeal of the Volcker Rule, these measures are
important and sensible changes to ensure much needed regulatory
clarity and to reduce burdensome compliance costs.
A central problem with the Volcker Rule was its design and
implementation. The Dodd-Frank Act unartfully conferred
responsibility for both implementing and enforcing the Volcker
Rule on five different federal financial regulators: the
Federal Reserve, the Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of the Currency (OCC),
the Securities and Exchange Commission (SEC), and the Commodity
Futures Trading Commission (CFTC). Not surprisingly, given
their disparate statutory mandates and regulatory missions,
these agencies struggled to achieve consensus on a regulation
to implement the Volcker Rule's vague legislative language. On
December 10, 2013, the agencies voted to approve a final
regulation implementing the Volcker Rule. The final rule totals
932 pages and 297,000 words.
The same five agencies that drafted the Volcker Rule are
also responsible now for its enforcement. Most bank holding
companies will likely be overseen by at least two of those
regulators, and some may be overseen by as many as four. Bank
holding companies that have a broker-dealer or a futures
commission merchant will also be subject to examinations by
self-regulatory organizations for compliance with the SEC's and
CFTC's rules.
These five regulators have disparate mandates and
regulatory philosophies. Bank regulators have traditionally
focused on the safety and soundness of the institutions they
supervise, whereas market regulators like the SEC and CFTC have
emphasized disclosure, conduct, investor protection and market
functionality and operations. These divergent approaches mean
that regulated institutions may well face conflicting guidance
and mandates from the regulators charged with implementing the
Volcker Rule. As a result of these divergent mandates among the
regulators, financial institutions may be asked to comply with
conflicting interpretations about whether a given trade or
activity violates the rule. Conflicting interpretations and
regulatory divergence are even more likely to happen because
the final rule contains no provisions requiring the regulators
to coordinate oversight and enforcement, or to harmonize the
different approaches that bank regulators and market regulators
take towards compliance.
In response to congressional concerns about the lack of a
harmonized enforcement approach, the five agencies tasked with
implementing the Volcker Rule announced in February 2014 that
they had formed an interagency working group that will meet
regularly to discuss implementation of the final Volcker Rule.
Some four years later, the working group has not yet created a
dedicated and public website at which institutions affected by
the Volcker Rule can review regulatory guidance, examination
protocols, or interpretations.
Regardless, the current regulatory framework results in
fragmentation and confusion for institutions subject to the
rule. The CFTC has jurisdiction of futures commission merchants
and swap dealers; the SEC over brokers, dealers, investment
companies and advisers, and security-based swap dealers; the
OCC over national banks; the FDIC over insured nonmember state
banks; and the Federal Reserve over bank holding companies and
their subsidiaries not otherwise regulated by other regulators,
state member banks, and foreign banking organizations. As
indicated, in some cases multiple agencies have responsibility
for a single banking entity--i.e., a national bank that is a
swap dealer, where a single trade and related hedge could be
booked at two different entities, each of which is regulated by
a different agency. This fragmentation of responsibility to
determine how to apply the Volcker rule to a particular banking
entity or trading desk is inefficient for both the banks and
the regulators.
The regulators' existing approach to coordination has not
worked and, as a result, banks have had difficulty obtaining
clear, consistent guidance. Even former Federal Reserve
Governor Daniel Tarullo noted in his farewell remarks,
``Efforts to achieve consistency in treatment across agencies
have been both time-consuming and, at times, unsuccessful.''
The Committee has learned that at least one regulated entity
who attempted to schedule a meeting with all five regulators in
the same room to describe the entity's compliance program and
solicit feedback from the regulators; but the regulators
advised the entity that if a joint meeting were to happen, some
of the agencies would be unable to provide feedback since the
regulators do not have an inter-agency information-sharing
agreement which would eliminate protections that otherwise
exist for bank-to-examiner conversations. The Committee also is
aware of instances in which the prudential regulators (jointly)
and the SEC (separately) have undertaken duplicative,
simultaneous examinations of the same trading desks. Further,
at least one regulated firm has received conflicting
instructions regarding trading desk size from multiple
examining agencies.
H.R. 4790 addresses the Volcker Rule's fragmented
regulatory structure by concentrating rulemaking authority in a
single agency--the Federal Reserve--and giving an entity's
primary federal regulator sole enforcement and examination
authority as it relates to the Volcker Rule. During their
respective testimonies before the Financial Services Committee
in 2018, both Treasury Secretary Steven Mnuchin and Federal
Reserve Chairman Jay Powell stated that they would support
amending the Volcker Rule in a manner that consolidates
rulemaking authority with the Federal Reserve.
In performing its rulemaking responsibilities, H.R. 4790
envisions a revised regulatory structure whereby the Federal
Reserve may consult with the OCC, FDIC, SEC, and CFTC. The
Committee also expects that the other four agencies will
consistently apply and implement the Federal Reserve's rules or
guidance during examinations and enforcement actions.
Consistent with these requirements, the Federal Reserve may
want to consider a method and develop a process to ensure that
if any agency involved with enforcing the Volcker Rule becomes
aware of an issue that may best be addressed by an amendment to
an existing rule or promulgation of a new rule that issue can
be reported to and, as appropriate, considered by the Federal
Reserve.
Consistent with recommendations from the Department of the
Treasury, in addition to streamlining the regulatory
implementation of the Volcker Rule, H.R. 4790 also exempts
banking organizations that do not have and are not controlled
by an entity with $10 billion or more in total consolidated
assets and total trading assets and trading liability that are
more than 5 percent of total consolidated assets. S. 2155, the
Economic Growth, Regulatory Relief and Consumer Protection Act,
includes a similar provision to exempt banks with under $10
billion in assets. The Senate passed S. 2155 by a roll-call
vote of 67-to-31 on March 14, 2018.
In light of the disproportionate compliance costs community
banks face as a result of the Volcker Rule, a bright-line
exemption like this makes sense because most small banks do not
even engage in proprietary trading or invest in or sponsor
private equity or hedge funds. While the Volcker Rule
regulations purportedly have provided banking entities with
under $10 billion in assets with relief from the rule's
compliance program requirements, these banks still must expend
considerable resources to ensure that their activities do not
constitute prohibited proprietary trading. Because of the
Volcker Rule's complexity as implemented, even those community
banks that do not conduct any proprietary trading have
nonetheless had to incur large costs simply proving what the
regulators already know--that they are not engaged in
activities covered by the rule. For instance, community banks
must review their investment portfolios to determine whether
they are purchasing or selling any securities for a ``trading
account''--a term that can be defined by the Volcker Rule under
any one of three different tests, one of which requires the
bank to divine the intent underlying each transaction.
Community banks also must perform due diligence to determine
whether each security in their portfolios qualifies for an
exemption from the rule. Thus, the community bank exemption
here will remove one more unnecessary regulatory burden
inflicted on community financial institutions by the Dodd-Frank
Act.
Hearings
The subcommittee on Capital Markets, Securities, and
Investment held hearings examining matters relating to H.R.
4790 on March 29, 2017, April 26, 2017, and April 28, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
March 21, 2018 and ordered H.R. 4790 to be reported favorably
to the House, as amended by a recorded vote of 50 yeas to 10
nays (recorded vote no. FC-171), a quorum being present. Before
the motion to report was offered, the Committee adopted an
amendment in the nature of a substitute offered by Mr. Foster
by voice vote.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House as amended. The motion
was agreed to by a recorded vote of 50 yeas to 10 nays (Record
vote no. FC-171), a quorum being present.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 4790,
as amended, will provide regulatory clarity and efficiencies
and eliminate burdensome costs to community banks by amending
the Volcker Rule to grant the Federal Reserve the sole
rulemaking authority, provide an entity's primary Federal
regulator with sole examination and enforcement authority, and
exempt community banks if they do not have and are not
controlled by an entity with $10 billion or more in total
consolidated assets and total trading assets and trading
liabilities that are more than 5 percent of total consolidated
assets.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 4, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4790, the Volcker
Rule Regulatory Harmonization Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Nathaniel
Frentz.
Sincerely,
Mark P. Hadley
(For Keith Hall, Director).
Enclosure.
H.R. 4790--The Volcker Rule Regulatory Harmonization Act
The Volcker Rule restricts financial institutions insured
by the Federal Deposit Insurance Corporation from engaging in
certain proprietary trading of securities, derivatives,
commodity futures, and options on those instruments. With some
exceptions, the rule also prohibits those institutions from
owning, sponsoring, or having certain relationships with hedge
funds and private equity funds. Rulemaking responsibilities
under the Volcker Rule are shared among a group of financial
regulatory institutions, including the Board of Governors of
the Federal Reserve System.
H.R. 4790 would amend current law to grant the Federal
Reserve's Board of Governors sole authority for that
rulemaking. The bill also would exclude community banks those
with less than $10 billion in assets and that meet certain
other criteria from the Volcker Rule's requirements.
CBO estimates that the change would not significantly
affect the budgets of any of the federal regulators because
final rules implementing the Volcker Rule have already been
adopted. Using information from affected agencies, CBO
estimates that any future costs to amend rules would be
insignificant. CBO also estimates that the exemption of
community banks would not significantly affect the workload or
other administrative costs of the relevant regulators.
Although CBO estimates that there is some probability of
civil penalties' being collected over the 2018-2027 period for
violations of the Volcker Rule, the bill's exemption for
community banks is unlikely to significantly affect the amount
of such penalties. CBO estimates that those penalties would be
small if they are assessed at all for such banks.
Because enacting the bill would affect direct spending and
revenues, pay-as-you-go procedures apply. However, CBO
estimates that any net changes in direct spending or revenues
would not be significant.
CBO estimates that enacting H.R. 4790 would not
significantly increase net direct spending or on-budget
deficits in any of the four consecutive 10-year periods
beginning in 2028.
H.R. 4790 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act.
The CBO staff contact for this estimate is Nathaniel
Frentz. The estimate was approved by John McClelland, Assistant
Director for Tax Analysis, and Theresa Gullo, Assistant
Director for Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 4790, as ``The Volcker Rule
Regulatory Harmonization Act''.
Section 2. Rulemaking authority under the Volcker Rule
This section amends Section 13(b) of the Bank Holding
Company Act of 1956, to give sole rulemaking authority to the
Federal Reserve. In doing so, it provides that the Board may,
as appropriate, consult with the OCC, FDIC, SEC, and CFTC to
adopt rules or guidance and provides certain rulemaking
requirements that the Federal Reserve shall perform as part of
its rulemaking function. Additionally, this section clarifies
that any rules or guidance that were issued prior to enactment
of this Act shall remain in effect until the Federal Reserve
issues a successor rule or guidance or amends such rule or
guidance. The section further makes clear that the Federal
Reserve, OCC, FDIC, SEC, and CFTC shall update any applicable
policies and procedures to ensure that such are consistent with
any rules or guidance issued by the Federal Reserve. Finally,
this section provides for a series of conforming amendments
consistent with providing the Federal Reserve sole rulemaking
authority.
Section 3. Enforcement; anti-evasion
This section amends Subsection (e) of section 13 of the
Bank Holding Company Act of 1956, to give the appropriate
Federal banking agency the sole examination and enforcement
authority over the respective banking entity under its
supervision or nonbank financial company under supervision by
the Federal Reserve. Similarly, this section also provides the
sole examination and enforcement authority to the SEC and CFTC
over a covered nonbank financial company for which the
respective agency is the primary Federal regulator.
Section 4. Exclusion of community banks from Volcker Rule
This section amends Section 13(h)(1) of the Bank Holding
Company Act of 1956, to exclude community banks that do not
have and are not controlled by a company that has total
consolidated assets of $10,000,000,000 and total trading assets
and trading liabilities that are more than 5 percent of total
consolidated assets.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
BANK HOLDING COMPANY ACT OF 1956
* * * * * * *
SEC. 13. PROHIBITIONS ON PROPRIETARY TRADING AND CERTAIN RELATIONSHIPS
WITH HEDGE FUNDS AND PRIVATE EQUITY FUNDS.
(a) In General.--
(1) Prohibition.--Unless otherwise provided in this
section, a banking entity shall not--
(A) engage in proprietary trading; or
(B) acquire or retain any equity,
partnership, or other ownership interest in or
sponsor a hedge fund or a private equity fund.
(2) Nonbank financial companies supervised by the
board.--Any nonbank financial company supervised by the
Board that engages in proprietary trading or takes or
retains any equity, partnership, or other ownership
interest in or sponsors a hedge fund or a private
equity fund shall be subject, by rule, as provided in
subsection (b)(2), to additional capital requirements
for and additional quantitative limits with regards to
such proprietary trading and taking or retaining any
equity, partnership, or other ownership interest in or
sponsorship of a hedge fund or a private equity fund,
except that permitted activities as described in
subsection (d) shall not be subject to the additional
capital and additional quantitative limits except as
provided in subsection (d)(3), as if the nonbank
financial company supervised by the Board were a
banking entity.
(b) Study and Rulemaking.--
(1) Study.--Not later than 6 months after the date of
enactment of this section, the Financial Stability
Oversight Council shall study and make recommendations
on implementing the provisions of this section so as
to--
(A) promote and enhance the safety and
soundness of banking entities;
(B) protect taxpayers and consumers and
enhance financial stability by minimizing the
risk that insured depository institutions and
the affiliates of insured depository
institutions will engage in unsafe and unsound
activities;
(C) limit the inappropriate transfer of
Federal subsidies from institutions that
benefit from deposit insurance and liquidity
facilities of the Federal Government to
unregulated entities;
(D) reduce conflicts of interest between the
self-interest of banking entities and nonbank
financial companies supervised by the Board,
and the interests of the customers of such
entities and companies;
(E) limit activities that have caused undue
risk or loss in banking entities and nonbank
financial companies supervised by the Board, or
that might reasonably be expected to create
undue risk or loss in such banking entities and
nonbank financial companies supervised by the
Board;
(F) appropriately accommodate the business of
insurance within an insurance company, subject
to regulation in accordance with the relevant
insurance company investment laws, while
protecting the safety and soundness of any
banking entity with which such insurance
company is affiliated and of the United States
financial system; and
(G) appropriately time the divestiture of
illiquid assets that are affected by the
implementation of the prohibitions under
subsection (a).
[(2) Rulemaking.--
[(A) In general.--Unless otherwise provided
in this section, not later than 9 months after
the completion of the study under paragraph
(1), the appropriate Federal banking agencies,
the Securities and Exchange Commission, and the
Commodity Futures Trading Commission, shall
consider the findings of the study under
paragraph (1) and adopt rules to carry out this
section, as provided in subparagraph (B).
[(B) Coordinated rulemaking.--
[(i) Regulatory authority.--The
regulations issued under this paragraph
shall be issued by--
[(I) the appropriate Federal
banking agencies, jointly, with
respect to insured depository
institutions;
[(II) the Board, with respect
to any company that controls an
insured depository institution,
or that is treated as a bank
holding company for purposes of
section 8 of the International
Banking Act, any nonbank
financial company supervised by
the Board, and any subsidiary
of any of the foregoing (other
than a subsidiary for which an
agency described in subclause
(I), (III), or (IV) is the
primary financial regulatory
agency);
[(III) the Commodity Futures
Trading Commission, with
respect to any entity for which
the Commodity Futures Trading
Commission is the primary
financial regulatory agency, as
defined in section 2 of the
Dodd-Frank Wall Street Reform
and Consumer Protection Act;
and
[(IV) the Securities and
Exchange Commission, with
respect to any entity for which
the Securities and Exchange
Commission is the primary
financial regulatory agency, as
defined in section 2 of the
Dodd-Frank Wall Street Reform
and Consumer Protection Act.
[(ii) Coordination, consistency, and
comparability.--In developing and
issuing regulations pursuant to this
section, the appropriate Federal
banking agencies, the Securities and
Exchange Commission, and the Commodity
Futures Trading Commission shall
consult and coordinate with each other,
as appropriate, for the purposes of
assuring, to the extent possible, that
such regulations are comparable and
provide for consistent application and
implementation of the applicable
provisions of this section to avoid
providing advantages or imposing
disadvantages to the companies affected
by this subsection and to protect the
safety and soundness of banking
entities and nonbank financial
companies supervised by the Board.
[(iii) Council role.--The Chairperson
of the Financial Stability Oversight
Council shall be responsible for
coordination of the regulations issued
under this section.]
(2) Rulemaking.--
(A) In general.--The Board may, as
appropriate, consult with the Comptroller of
the Currency, the Federal Deposit Insurance
Corporation, the Securities and Exchange
Commission, or the Commodity Futures Trading
Commission to adopt rules or guidance to carry
out this section, as provided in subparagraph
(B).
(B) Rulemaking requirements.--In adopting a
rule or guidance under subparagraph (A), the
Board--
(i) shall consider the findings of
the report required in paragraph (1)
and, as appropriate, subsequent
reports;
(ii) shall assure, to the extent
possible, that such rule or guidance
provide for consistent application and
implementation of the applicable
provisions of this section to avoid
providing advantages or imposing
disadvantages to the companies affected
by this subsection and to protect the
safety and soundness of banking
entities and nonbank financial
companies supervised by the Board; and
(iii) shall include requirements to
ensure compliance with this section,
such as requirements regarding internal
controls and recordkeeping.
(C) Authority.--The Board shall have sole
authority to issue and amend rules under this
section after the date of the enactment of this
paragraph.
(D) Conforming authority.--
(i) Continuity of regulations.--Any
rules or guidance issued under this
section prior to the date of enactment
of this paragraph shall continue in
effect until the Board issues a
successor rule or guidance, or amends
such rule or guidance, pursuant to
subparagraph (C).
(ii) Applicable guidance.--In
performing examinations or other
supervisory duties, the appropriate
Federal banking agencies, the
Securities and Exchange Commission, and
the Commodity Futures Trading
Commission, as appropriate, shall
update any applicable policies and
procedures to ensure that such policies
and procedures are consistent (to the
extent practicable) with any rules or
guidance issued pursuant to
subparagraph (C).
(c) Effective Date.--
(1) In general.--Except as provided in paragraphs (2)
and (3), this section shall take effect on the earlier
of--
(A) 12 months after the date of the issuance
of final rules under subsection (b); or
(B) 2 years after the date of enactment of
this section.
(2) Conformance period for divestiture.--A banking
entity or nonbank financial company supervised by the
Board shall bring its activities and investments into
compliance with the requirements of this section not
later than 2 years after the date on which the
requirements become effective pursuant to this section
or 2 years after the date on which the entity or
company becomes a nonbank financial company supervised
by the Board. The Board may, by rule or order, extend
this two-year period for not more than one year at a
time, if, in the judgment of the Board, such an
extension is consistent with the purposes of this
section and would not be detrimental to the public
interest. The extensions made by the Board under the
preceding sentence may not exceed an aggregate of 3
years.
(3) Extended transition for illiquid funds.--
(A) Application.--The Board may, upon the
application of a banking entity, extend the
period during which the banking entity, to the
extent necessary to fulfill a contractual
obligation that was in effect on May 1, 2010,
may take or retain its equity, partnership, or
other ownership interest in, or otherwise
provide additional capital to, an illiquid
fund.
(B) Time limit on approval.--The Board may
grant 1 extension under subparagraph (A), which
may not exceed 5 years.
(4) Divestiture required.--Except as otherwise
provided in subsection (d)(1)(G), a banking entity may
not engage in any activity prohibited under subsection
(a)(1)(B) after the earlier of--
(A) the date on which the contractual
obligation to invest in the illiquid fund
terminates; and
(B) the date on which any extensions granted
by the Board under paragraph (3) expire.
(5) Additional capital during transition period.--
[Notwithstanding paragraph (2), on the date on which
the rules are issued under subsection (b)(2), the
appropriate Federal banking agencies, the Securities
and Exchange Commission, and the Commodity Futures
Trading Commission shall issue rules, as provided in
subsection (b)(2),] The Board shall have the authority
to impose additional capital requirements, and any
other restrictions, as appropriate, on any equity,
partnership, or ownership interest in or sponsorship of
a hedge fund or private equity fund by a banking
entity.
(6) Special rulemaking.--Not later than 6 months
after the date of enactment of this section, the Board
shall issues rules to implement paragraphs (2) and (3).
(d) Permitted Activities.--
(1) In general.--Notwithstanding the restrictions
under subsection (a), to the extent permitted by any
other provision of Federal or State law, and subject to
the limitations under paragraph (2) and any
restrictions or limitations that [the appropriate
Federal banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission,] the Board may determine, the following
activities (in this section referred to as ``permitted
activities''') are permitted:
(A) The purchase, sale, acquisition, or
disposition of obligations of the United States
or any agency thereof, obligations,
participations, or other instruments of or
issued by the Government National Mortgage
Association, the Federal National Mortgage
Association, the Federal Home Loan Mortgage
Corporation, a Federal Home Loan Bank, the
Federal Agricultural Mortgage Corporation, or a
Farm Credit System institution chartered under
and subject to the provisions of the Farm
Credit Act of 1971 (12 U.S.C. 2001 et seq.),
and obligations of any State or of any
political subdivision thereof.
(B) The purchase, sale, acquisition, or
disposition of securities and other instruments
described in subsection (h)(4) in connection
with underwriting or market-making-related
activities, to the extent that any such
activities permitted by this subparagraph are
designed not to exceed the reasonably expected
near term demands of clients, customers, or
counterparties.
(C) Risk-mitigating hedging activities in
connection with and related to individual or
aggregated positions, contracts, or other
holdings of a banking entity that are designed
to reduce the specific risks to the banking
entity in connection with and related to such
positions, contracts, or other holdings.
(D) The purchase, sale, acquisition, or
disposition of securities and other instruments
described in subsection (h)(4) on behalf of
customers.
(E) Investments in one or more small business
investment companies, as defined in section 102
of the Small Business Investment Act of 1958
(15 U.S.C. 662), investments designed primarily
to promote the public welfare, of the type
permitted under paragraph (11) of section 5136
of the Revised Statutes of the United States
(12 U.S.C. 24), or investments that are
qualified rehabilitation expenditures with
respect to a qualified rehabilitated building
or certified historic structure, as such terms
are defined in section 47 of the Internal
Revenue Code of 1986 or a similar State
historic tax credit program.
(F) The purchase, sale, acquisition, or
disposition of securities and other instruments
described in subsection (h)(4) by a regulated
insurance company directly engaged in the
business of insurance for the general account
of the company and by any affiliate of such
regulated insurance company, provided that such
activities by any affiliate are solely for the
general account of the regulated insurance
company, if--
(i) the purchase, sale, acquisition,
or disposition is conducted in
compliance with, and subject to, the
insurance company investment laws,
regulations, and written guidance of
the State or jurisdiction in which each
such insurance company is domiciled;
and
(ii) [the appropriate Federal banking
agencies] the Board, after consultation
with the Financial Stability Oversight
Council and the relevant insurance
commissioners of the States and
territories of the United States, [have
not jointly] has not determined, after
notice and comment, that a particular
law, regulation, or written guidance
described in clause (i) is insufficient
to protect the safety and soundness of
the banking entity, or of the financial
stability of the United States.
(G) Organizing and offering a private equity
or hedge fund, including serving as a general
partner, managing member, or trustee of the
fund and in any manner selecting or controlling
(or having employees, officers, directors, or
agents who constitute) a majority of the
directors, trustees, or management of the fund,
including any necessary expenses for the
foregoing, only if--
(i) the banking entity provides bona
fide trust, fiduciary, or investment
advisory services;
(ii) the fund is organized and
offered only in connection with the
provision of bona fide trust,
fiduciary, or investment advisory
services and only to persons that are
customers of such services of the
banking entity;
(iii) the banking entity does not
acquire or retain an equity interest,
partnership interest, or other
ownership interest in the funds except
for a de minimis investment subject to
and in compliance with paragraph (4);
(iv) the banking entity complies with
the restrictions under paragraphs (1)
and (2) of subparagraph (f);
(v) the banking entity does not,
directly or indirectly, guarantee,
assume, or otherwise insure the
obligations or performance of the hedge
fund or private equity fund or of any
hedge fund or private equity fund in
which such hedge fund or private equity
fund invests;
(vi) the banking entity does not
share with the hedge fund or private
equity fund, for corporate, marketing,
promotional, or other purposes, the
same name or a variation of the same
name;
(vii) no director or employee of the
banking entity takes or retains an
equity interest, partnership interest,
or other ownership interest in the
hedge fund or private equity fund,
except for any director or employee of
the banking entity who is directly
engaged in providing investment
advisory or other services to the hedge
fund or private equity fund; and
(viii) the banking entity discloses
to prospective and actual investors in
the fund, in writing, that any losses
in such hedge fund or private equity
fund are borne solely by investors in
the fund and not by the banking entity,
and otherwise complies with any
additional rules of the [appropriate
Federal banking agencies, the
Securities and Exchange Commission, or
the Commodity Futures Trading
Commission,] Board, as provided in
subsection (b)(2), designed to ensure
that losses in such hedge fund or
private equity fund are borne solely by
investors in the fund and not by the
banking entity.
(H) Proprietary trading conducted by a
banking entity pursuant to paragraph (9) or
(13) of section 4(c), provided that the trading
occurs solely outside of the United States and
that the banking entity is not directly or
indirectly controlled by a banking entity that
is organized under the laws of the United
States or of one or more States.
(I) The acquisition or retention of any
equity, partnership, or other ownership
interest in, or the sponsorship of, a hedge
fund or a private equity fund by a banking
entity pursuant to paragraph (9) or (13) of
section 4(c) solely outside of the United
States, provided that no ownership interest in
such hedge fund or private equity fund is
offered for sale or sold to a resident of the
United States and that the banking entity is
not directly or indirectly controlled by a
banking entity that is organized under the laws
of the United States or of one or more States.
(J) Such other activity as the [appropriate
Federal banking agencies, the Securities and
Exchange Commission, and the Commodity Futures
Trading Commission] Board determine, by rule,
as provided in subsection (b)(2), would promote
and protect the safety and soundness of the
banking entity and the financial stability of
the United States.
(2) Limitation on permitted activities.--
(A) In general.--No transaction, class of
transactions, or activity may be deemed a
permitted activity under paragraph (1) if the
transaction, class of transactions, or
activity--
(i) would involve or result in a
material conflict of interest (as such
term shall be defined by rule as
provided in subsection (b)(2)) between
the banking entity and its clients,
customers, or counterparties;
(ii) would result, directly or
indirectly, in a material exposure by
the banking entity to high-risk assets
or high-risk trading strategies (as
such terms shall be defined by rule as
provided in subsection (b)(2));
(iii) would pose a threat to the
safety and soundness of such banking
entity; or
(iv) would pose a threat to the
financial stability of the United
States.
(B) Rulemaking.--The [appropriate Federal
banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission] Board shall issue regulations to
implement subparagraph (A), as part of the
regulations issued under subsection (b)(2).
(3) Capital and quantitative limitations.--The
[appropriate Federal banking agencies, the Securities
and Exchange Commission, and the Commodity Futures
Trading Commission] Board shall, as provided in
subsection (b)(2), adopt rules imposing additional
capital requirements and quantitative limitations,
including diversification requirements, regarding the
activities permitted under this section if the
[appropriate Federal banking agencies, the Securities
and Exchange Commission, and the Commodity Futures
Trading Commission] Board determine that additional
capital and quantitative limitations are appropriate to
protect the safety and soundness of banking entities
engaged in such activities.
(4) De minimis investment.--
(A) In general.--A banking entity may make
and retain an investment in a hedge fund or
private equity fund that the banking entity
organizes and offers, subject to the
limitations and restrictions in subparagraph
(B) for the purposes of--
(i) establishing the fund and
providing the fund with sufficient
initial equity for investment to permit
the fund to attract unaffiliated
investors; or
(ii) making a de minimis investment.
(B) Limitations and restrictions on
investments.--
(i) Requirement to seek other
investors.--A banking entity shall
actively seek unaffiliated investors to
reduce or dilute the investment of the
banking entity to the amount permitted
under clause (ii).
(ii) Limitations on size of
investments.--Notwithstanding any other
provision of law, investments by a
banking entity in a hedge fund or
private equity fund shall--
(I) not later than 1 year
after the date of establishment
of the fund, be reduced through
redemption, sale, or dilution
to an amount that is not more
than 3 percent of the total
ownership interests of the
fund;
(II) be immaterial to the
banking entity, as defined, by
rule, pursuant to subsection
(b)(2), but in no case may the
aggregate of all of the
interests of the banking entity
in all such funds exceed 3
percent of the Tier 1 capital
of the banking entity.
(iii) Capital.--For purposes of
determining compliance with applicable
capital standards under paragraph (3),
the aggregate amount of the outstanding
investments by a banking entity under
this paragraph, including retained
earnings, shall be deducted from the
assets and tangible equity of the
banking entity, and the amount of the
deduction shall increase commensurate
with the leverage of the hedge fund or
private equity fund.
(C) Extension.--Upon an application by a
banking entity, the Board may extend the period
of time to meet the requirements under
subparagraph (B)(ii)(I) for 2 additional years,
if the Board finds that an extension would be
consistent with safety and soundness and in the
public interest.
[(e) Anti-evasion.--
[(1) Rulemaking.--The appropriate Federal banking
agencies, the Securities and Exchange Commission, and
the Commodity Futures Trading Commission shall issue
regulations, as part of the rulemaking provided for in
subsection (b)(2), regarding internal controls and
recordkeeping, in order to insure compliance with this
section.
[(2) Termination of activities or investment.--
Notwithstanding any other provision of law, whenever an
appropriate Federal banking agency, the Securities and
Exchange Commission, or the Commodity Futures Trading
Commission, as appropriate, has reasonable cause to
believe that a banking entity or nonbank financial
company supervised by the Board under the respective
agency's jurisdiction has made an investment or engaged
in an activity in a manner that functions as an evasion
of the requirements of this section (including through
an abuse of any permitted activity) or otherwise
violates the restrictions under this section, the
appropriate Federal banking agency, the Securities and
Exchange Commission, or the Commodity Futures Trading
Commission, as appropriate, shall order, after due
notice and opportunity for hearing, the banking entity
or nonbank financial company supervised by the Board to
terminate the activity and, as relevant, dispose of the
investment. Nothing in this paragraph shall be
construed to limit the inherent authority of any
Federal agency or State regulatory authority to further
restrict any investments or activities under otherwise
applicable provisions of law.]
(e) Enforcement; Anti-evasion.--
(1) Appropriate federal banking agency.--
Notwithstanding any other provision of law except for
any rules or guidance issued under subsection (b)(2),
whenever the appropriate Federal banking agency has
reasonable cause to believe that a banking entity or
nonbank financial company supervised by the Board has
made an investment or engaged in an activity in a
manner that either violates the restrictions under this
section, or that functions as an evasion of the
requirements of this section (including through an
abuse of any permitted activity), such appropriate
Federal banking agency shall order, after due notice
and opportunity for hearing, the banking entity or
nonbank financial company supervised by the Board to
terminate the activity and, as relevant, dispose of the
investment.
(2) Securities and exchange commission and commodity
futures trading commission.--
(A) In general.--Notwithstanding any other
provision of law except for any rules or
guidance issued under subsection (b)(2),
whenever the Securities and Exchange Commission
or the Commodity Futures Trading Commission, as
appropriate, has reasonable cause to believe
that a covered nonbank financial company for
which the respective agency is the primary
Federal regulator has made an investment or
engaged in an activity in a manner that either
violates the restrictions under this section,
or that functions as an evasion of the
requirements of this section (including through
an abuse of any permitted activity), the
Securities and Exchange Commission or the
Commodity Futures Trading Commission, as
appropriate, shall order, after due notice and
opportunity for hearing, the covered nonbank
financial company to terminate the activity
and, as relevant, dispose of the investment.
(B) Covered nonbank financial company
defined.--In this paragraph, the term ``covered
nonbank financial company'' means a nonbank
financial company (as defined in section 102 of
the Financial Stability Act of 2010) supervised
by the Securities and Exchange Commission or
the Commodity Futures Trading Commission, as
appropriate.
(f) Limitations on Relationships With Hedge Funds and Private
Equity Funds.--
(1) In general.--No banking entity that serves,
directly or indirectly, as the investment manager,
investment adviser, or sponsor to a hedge fund or
private equity fund, or that organizes and offers a
hedge fund or private equity fund pursuant to paragraph
(d)(1)(G), and no affiliate of such entity, may enter
into a transaction with the fund, or with any other
hedge fund or private equity fund that is controlled by
such fund, that would be a covered transaction, as
defined in section 23A of the Federal Reserve Act (12
U.S.C. 371c), with the hedge fund or private equity
fund, as if such banking entity and the affiliate
thereof were a member bank and the hedge fund or
private equity fund were an affiliate thereof.
(2) Treatment as member bank.--A banking entity that
serves, directly or indirectly, as the investment
manager, investment adviser, or sponsor to a hedge fund
or private equity fund, or that organizes and offers a
hedge fund or private equity fund pursuant to paragraph
(d)(1)(G), shall be subject to section 23B of the
Federal Reserve Act (12 U.S.C. 371c 1), as if such
banking entity were a member bank and such hedge fund
or private equity fund were an affiliate thereof.
(3) Permitted services.--
(A) In general.--Notwithstanding paragraph
(1), the Board may permit a banking entity to
enter into any prime brokerage transaction with
any hedge fund or private equity fund in which
a hedge fund or private equity fund managed,
sponsored, or advised by such banking entity
has taken an equity, partnership, or other
ownership interest, if--
(i) the banking entity is in
compliance with each of the limitations
set forth in subsection (d)(1)(G) with
regard to a hedge fund or private
equity fund organized and offered by
such banking entity;
(ii) the chief executive officer (or
equivalent officer) of the banking
entity certifies in writing annually
(with a duty to update the
certification if the information in the
certification materially changes) that
the conditions specified in subsection
(d)(1)(g)(v) are satisfied; and
(iii) the Board has determined that
such transaction is consistent with the
safe and sound operation and condition
of the banking entity.
(B) Treatment of prime brokerage
transactions.--For purposes of subparagraph
(A), a prime brokerage transaction described in
subparagraph (A) shall be subject to section
23B of the Federal Reserve Act (12 U.S.C. 371c-
1) as if the counterparty were an affiliate of
the banking entity.
(4) Application to nonbank financial companies
supervised by the board.--The [appropriate Federal
banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission] Board shall adopt rules, as provided in
subsection (b)(2), imposing additional capital charges
or other restrictions for nonbank financial companies
supervised by the Board to address the risks to and
conflicts of interest of banking entities described in
paragraphs (1), (2), and (3) of this subsection.
(g) Rules of Construction.--
(1) Limitation on contrary authority.--Except as
provided in this section, notwithstanding any other
provision of law, the prohibitions and restrictions
under this section shall apply to activities of a
banking entity or nonbank financial company supervised
by the Board, even if such activities are authorized
for a banking entity or nonbank financial company
supervised by the Board.
(2) Sale or securitization of loans.--Nothing in this
section shall be construed to limit or restrict the
ability of a banking entity or nonbank financial
company supervised by the Board to sell or securitize
loans in a manner otherwise permitted by law.
(3) Authority of federal agencies and state
regulatory authorities.--Nothing in this section shall
be construed to limit the inherent authority of any
Federal agency or State regulatory authority under
otherwise applicable provisions of law.
(h) Definitions.--In this section, the following definitions
shall apply:
(1) Banking entity.--The term ``banking entity''
means any insured depository institution (as defined in
section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813)), any company that controls an insured
depository institution, or that is treated as a bank
holding company for purposes of section 8 of the
International Banking Act of 1978, and any affiliate or
subsidiary of any such entity. For purposes of this
paragraph, the term ``insured depository institution''
does not include an [institution that functions solely
in a trust or fiduciary capacity, if--] institution--
(A) that functions solely in a trust or
fiduciary capacity, if--
[(A)] (i) all or substantially all of
the deposits of such institution are in
trust funds and are received in a bona
fide fiduciary capacity;
[(B)] (ii) no deposits of such
institution which are insured by the
Federal Deposit Insurance Corporation
are offered or marketed by or through
an affiliate of such institution;
[(C)] (iii) such institution does not
accept demand deposits or deposits that
the depositor may withdraw by check or
similar means for payment to third
parties or others or make commercial
loans; and
[(D)] (iv) such institution does
not--
[(i)] (I) obtain payment or
payment related services from
any Federal Reserve bank,
including any service referred
to in section 11A of the
Federal Reserve Act (12 U.S.C.
248a); or
[(ii)] (II) exercise discount
or borrowing privileges
pursuant to section 19(b)(7) of
the Federal Reserve Act (12
U.S.C. 461(b)(7))[.]; or
(B) that does not have and is not controlled
by a company that has--
(i) more than $10,000,000,000 in
total consolidated assets; and
(ii) total trading assets and trading
liabilities, as reported on the most
recent applicable regulatory filing
filed by the institution, that are more
than 5 percent of total consolidated
assets.
(2) Hedge fund; private equity fund.--The terms
``hedge fund'' and ``private equity fund'' mean an
issuer that would be an investment company, as defined
in the Investment Company Act of 1940 (15 U.S.C. 80a-1
et seq.), but for section 3(c)(1) or 3(c)(7) of that
Act, or such similar funds as the [appropriate Federal
banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission] Board may, by rule, as provided in
subsection (b)(2), determine.
(3) Nonbank financial company supervised by the
board.--The term ``nonbank financial company supervised
by the Board'' means a nonbank financial company
supervised by the Board of Governors, as defined in
section 102 of the Financial Stability Act of 2010.
(4) Proprietary trading.--The term ``proprietary
trading'', when used with respect to a banking entity
or nonbank financial company supervised by the Board,
means engaging as a principal for the trading account
of the banking entity or nonbank financial company
supervised by the Board in any transaction to purchase
or sell, or otherwise acquire or dispose of, any
security, any derivative, any contract of sale of a
commodity for future delivery, any option on any such
security, derivative, or contract, or any other
security or financial instrument that the [appropriate
Federal banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission] Board may, by rule as provided in
subsection (b)(2), determine.
(5) Sponsor.--The term to ``sponsor'' a fund means--
(A) to serve as a general partner, managing
member, or trustee of a fund;
(B) in any manner to select or to control (or
to have employees, officers, or directors, or
agents who constitute) a majority of the
directors, trustees, or management of a fund;
or
(C) to share with a fund, for corporate,
marketing, promotional, or other purposes, the
same name or a variation of the same name.
(6) Trading account.--The term ``trading account''
means any account used for acquiring or taking
positions in the securities and instruments described
in paragraph (4) principally for the purpose of selling
in the near term (or otherwise with the intent to
resell in order to profit from short-term price
movements), and any such other accounts as the
[appropriate Federal banking agencies, the Securities
and Exchange Commission, and the Commodity Futures
Trading Commission] Board may, by rule as provided in
subsection (b)(2), determine.
(7) Illiquid fund.--
(A) In general.--The term ``illiquid fund''
means a hedge fund or private equity fund
that--
(i) as of May 1, 2010, was
principally invested in, or was
invested and contractually committed to
principally invest in, illiquid assets,
such as portfolio companies, real
estate investments, and venture capital
investments; and
(ii) makes all investments pursuant
to, and consistent with, an investment
strategy to principally invest in
illiquid assets. In issuing rules
regarding this subparagraph, the Board
shall take into consideration the terms
of investment for the hedge fund or
private equity fund, including
contractual obligations, the ability of
the fund to divest of assets held by
the fund, and any other factors that
the Board determines are appropriate.
(B) Hedge fund.--For the purposes of this
paragraph, the term ``hedge fund'' means any
fund identified under subsection (h)(2), and
does not include a private equity fund, as such
term is used in section 203(m) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-
3(m)).
* * * * * * *
MINORITY VIEWS
H.R. 4790 is the latest attempt to weaken the Volcker Rule,
a cornerstone of Wall Street reform enacted in the wake of the
financial crisis that prohibits taxpayer-backed banks from
risky proprietary trading and from owning hedge and private
equity funds. The bill would create a dangerous loophole by
providing a blanket exemption from the Volcker Rule for banks
with consolidated assets of $10 billion or less and with less
than 5% of those assets in trading assets. The bill would also
delegate sole rulemaking authority on the Volcker Rule to the
Federal Reserve, inappropriately and unnecessarily taking away
the jurisdiction of the Federal Deposit Insurance Corporation
(FDIC), Office of the Comptroller of Currency (OCC), Securities
and Exchange Commission (SEC), and Commodity Futures Trading
Commission (CFTC) and making it easier for the Trump
Administration to weaken or repeal the rule.
Leading up to the financial crisis, Wall Street megabanks
engaged in ``proprietary trading,'' which is essentially
speculative, highly-leveraged bets that benefit their bottom
line, but use federally-insured loans backed by the U.S.
taxpayer. When the housing bubble finally burst, these bets in
risky credit-default swaps and subprime mortgage-backed
securities led to massive losses and a federal bailout. To
protect the American taxpayer and the economy from this sort of
risky trading, Congress included the Volcker Rule as part of
the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Seven years later, the Volcker Rule is largely in place. It
has resulted in less reckless risk-taking by Wall Street
megabanks and a stronger financial system. And, despite dire
predictions by opponents, our markets are adapting and
thriving. For example, in the bond market, which has long been
dominated by bank dealers, we have seen record new bond
issuances by companies seeking to raise funds and record
trading volumes in those bonds. Most other metrics also show a
healthy, liquid corporate bond market.
Nevertheless, H.R. 4790 would provide an exemption from the
Volcker Rule's prohibitions against proprietary trading and
owning hedge and private equity funds for entities with
consolidated assets of $10 billion or less and with less than
5% of those assets in trading assets. While most community
banks currently do not engage in such risky activities, a
blanket exemption sends them the Congressional thumbs-up for
them to do so in the future instead of focusing on the
traditional business of banking. This blanket exemption is
opposed by former Fed Chairman Paul Volcker, FDIC Chairman
Martin Gruenberg, FDIC Vice Chairman Thomas Hoenig, and
investor advocates. According to Mr. Hoenig, the exemption
could ``open a loophole that would invite abuse of the safety
net in the future.'' If we truly want to support our community
banks while ensuring that they remain in the traditional
business of banking, we should be looking at other ways to
reduce their compliance burden, such as by creating a
presumption of compliance with the Volcker Rule.
H.R. 4790 would also repeal the requirement that the
Federal Reserve, OCC, FDIC, CFTC, and SEC jointly implement the
rule. Instead, the bill would delegate sole rulemaking
authority to the Federal Reserve, which could choose to consult
with the other banking regulators, the SEC or the CFTC. This
would unreasonably cut the FDIC out of any future rule changes,
even though it is the regulator charged with protecting deposit
insurance against the very risky, speculative activities the
Volcker Rule was designed to prevent. It also cuts the SEC and
CFTC out from the rulemaking process, even though those
agencies have the expertise and jurisdiction over broker-
dealers and futures traders and their market making activities.
Worse, this change would make it easier for the Trump
administration to weaken and repeal the rule even though it was
efficiently promulgated in 2 years and the regulators are now
working together to make appropriate changes. While the bill
would at least allow the appropriate banking regulators, SEC,
and CFTC to enforce the rule, such enforcement authority is
meaningless if the Volcker rule is effectively gutted by the
Trump Administration.
For these reasons, we oppose H.R. 4790.
Maxine Waters.
Michael E. Capuano.
Al Green.
Carolyn B. Maloney.
Nydia M. Velazquez.
[all]