Volcker Revamp Could Free Banks to Boost Investment Fund Stakes
Volcker Revamp Could Free Banks to Boost Investment Fund Stakes
(Bloomberg) -- Wall Street banks will be given clearer rules for how they can invest in private equity and hedge funds when U.S. regulators roll out their overhaul of Volcker Rule trading restrictions next week, according to people familiar with the matter.
Five agencies are poised to approve a final rule that simplifies the Dodd-Frank Act ban on banks betting with their own cash. It could also free them to put more money in investment funds by removing uncertainty over how such activity would be treated, said the three people who requested anonymity because the details aren’t yet public.
The Volcker 2.0 plan will tell banks that when they take stakes in third-party funds while underwriting or making markets for clients -- permitted activities under Dodd-Frank -- they don’t have to count it against overall limits for investing in private equity and hedge funds, the people said. The new rule would also boost the ability to hedge such investments and eliminate restrictions on certain foreign investment funds.
The Federal Deposit Insurance Corp.’s board is set to vote on the rule Tuesday, and the featured event will be the expected overhaul of Volcker’s proprietary trading ban. People familiar with the effort have said the regulators intend to revamp the way they calculate what trading is banned by the rule.
The five-agency rule also has to be approved by the Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission and Commodity Futures Trading Commission.
Every change to fund limits suggested when the overhaul was initially proposed last year will be tackled in the final rule, the people said. And when the regulators issue a proposal to make additional changes to the investment fund provisions, they will aim to clarify aspects that Wall Street has criticized and try to align fund limits to what they think was intended when the rules were written, the people said.
The FDIC, Fed, SEC, OCC and CFTC all declined to comment.
When regulators appointed by President Donald Trump raced to propose Volcker 2.0 last year, they hardly addressed the part of the rule that restricted banks’ investments in private equity and hedge funds. Wall Street banks have eagerly awaited more leeway and clarity about how they can put money into funds, so the agencies are now trying to address that by finalizing a few points next week and proposing several others.
“Implementation of the Volcker Rule has been challenging for both banks and examiners, with many requirements that are extremely complex and overly subjective,” the FDIC said in a statement Friday. Next week’s effort is meant to “simplify the rule, provide more certainty for banks, and tailor requirements to reflect the size and scope of a bank’s trading activities,” the agency said.
The regulators are expected to abandon a widely panned idea to link compliance to accounting rules, Bloomberg News has previously reported. The final rule will instead lean more on existing tests for which trades will be banned.
The regulators are also set to reduce the amount of information the banks continually need to report to government supervisors -- cutting some categories and better tailoring others, the people said. The overall impact would be to make a very complex compliance exercise simpler and less expensive to execute.
But beyond easing compliance headaches, the proposal to change the banks’ ability to invest in funds may have the most significant business impact for the industry. The agencies are seeking to answer one of the chief concerns of Wall Street banks that the existing Volcker Rule’s exemptions from the funds limits are, “too narrowly drawn,” as the Bank Policy Institute said in a comment letter last year.
To contact the reporters on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net;Ben Bain in Washington at bbain2@bloomberg.net
To contact the editors responsible for this story: Gregory Mott at gmott1@bloomberg.net, Steve Geimann
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