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Section 619 of Dodd-Frank (the “Volcker Rule”) and implementing regulations prohibit banking entities from proprietary trading directly for their own trading accounts and from sponsoring or owning and entering into certain transactions with “covered funds,” all subject to several enumerated exemptions. 

In October 2011, the FDIC, Federal Reserve, OCC and SEC (“the Agencies”) jointly proposed the Volcker Rule, as directed by Section 619. Federal regulators approved final regulations implementing the “Volcker Rule” on December 10, 2013.

“Covered funds” is defined in the Volcker Rule regulations to include companies that rely on the Section 3(c)(1) and 3(c)(7) private offering exclusions from registration as investment companies under the Investment Company Act of 1940. Securitization special purpose vehicles often rely on these exemptions and in such circumstances, absent an exemption under the final Volcker Rule regulations or the ability to rely on another exemption from registration as an investment company, banks would be prohibited from owning or sponsoring such entities or entering into certain transactions, such as loans and derivatives transactions, with such entities for which they act as investment advisor, commodity trading advisor or sponsor.

In January 14, 2014, the agencies approved an interim final rule to permit banks to retain certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) from the investment prohibitions of the Volcker Rule. The interim final rule was effective on April 1, 2014.

In April 2014, the Federal Reserve announced that it will allow banking entities two additional one-year extensions to conform their ownership interests in and sponsorship of certain collateralized loan obligations (CLOs) covered by the Volcker Rule. Under the Board’s announcement the conformance period would be extended until July 21, 2017, for CLOs that were in place as of December 31, 2013, that do not qualify for the exclusion in the final Volcker Rule for loan securitizations.

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