Kathleen A. Scott

On May 24, the President signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) (Public Law 115-174), which includes some revisions to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, but not its wholesale repeal. Shortly thereafter, proposed changes to the Volcker Rule were approved to be issued for comment by the federal banking, commodities and securities regulators.

This month’s column will discuss how some of these legislative, and proposed regulatory, changes could affect non-US banks operating in the United States.

Some Highlights of the New Law

• Systemic Risk

One of the most publicized provisions in EGRRCPA is the change in the statutory threshold of “bank holding companies,” a term which includes non-US banks with US banking operations, that are deemed to be of systemic risk. Under Dodd-Frank, bank holding companies with $50 billion or more of total consolidated assets essentially are deemed to be of risk to US financial stability and are subject to additional prudential regulation. These additional obligations include establishing risk committees, conducting internal stress tests, and complying with enhanced capital requirements. A non-US bank with US banking operations with $50 billion or more in total global consolidated assets, and US non-branch assets of $50 billion or more, is required to establish an intermediate holding company (IHC) to hold the interests in most of its US subsidiaries.

Under EGRRCPA, this “systemic risk threshold” is increased from $50 billion of total consolidated assets to $250 billion of total consolidated assets, thus narrowing the field of those bank holding companies, US and non-US, subject to the enhanced prudential standards. However, the Federal Reserve Board retains the ability to impose any of those enhanced prudential standards on bank holding companies with more than $100 billion if it believes that it is necessary for US financial stability or safety and soundness. Concerns were raised during a Senate Banking Committee hearing in April about an easing of regulation on those non-US banks that globally would have more than $250 billion in total global consolidated assets, but less than that in a US IHC. In response to that concern, Federal Reserve Board Vice Chairman Randall Quarles noted that there was nothing in the then-pending bill that would require the Federal Reserve Board to change the current threshold for establishment of IHCs or the imposition of enhanced prudential standards, but that he was not in a position to commit the entire Federal Reserve Board to that positon as a final outcome.

• Other Regulatory Relief

The Volcker Rule, which prohibits banking entities from engaging in proprietary trading and sponsoring or investing in hedge funds or private equity funds, is amended by excluding from the Volcker Rule a banking entity that does not have (or is controlled by a company that does not have) more than $10 billion in total consolidated assets and does not have total trading assets and liabilities that are more than 5 percent of total consolidated assets. This provision is aimed at smaller US banks.

The Volcker Rule also is amended by lifting the prohibition on a banking entity organizing or offering a hedge fund or private equity fund using the name of the banking entity in the name of the fund. The fund will now be able to have the same name or variation of the same name as an investment adviser to the fund, provided the name does not include the word “bank” and the investment adviser is not an insured depository institution or a foreign bank with US banking operations.

In addition, the new law amends the exclusion from the definition of “investment company” that is contained in section 3(c)(1) of the Investment Company Act for fund interests held by not more than 100 persons. This section is amended to increase that number to not more than 250 persons in the case of certain “qualifying venture capital funds,” which are defined as venture capital funds with a maximum of $10 billion in aggregate capital contributions and uncalled committed capital. This amendment has the collateral effect of potentially subjecting more private equity funds to the restrictions of the Volcker Rule. “Covered funds” subject to the Volcker Rule generally are those subject to sections 3(c)(1) and 3(c)(7) of the Investment Company Act. As a result, this amendment would include those additional funds captured under section 3(c)(1) of the Investment Company Act as “covered funds” under Volcker. As a consequence, if a banking entity wants to sponsor or invest in a fund newly subject to the Volcker Rule as a result of this amendment, it will need an alternative legal authority for such sponsorship or investment in order to comply with the Volcker Rule covered fund restrictions.

Proposed Changes to the Volcker Rule

By June 5, the five financial services regulators responsible for the Volcker Rule (the Federal Reserve Board, Federal Deposit Insurance Corporation, Comptroller of the Currency, Commodity Futures Trading Commission and Securities and Exchange Commission) each approved proposed changes to the Volcker Rule to be issued for public comment.

• Proposed SOTUS Changes

Many banks rely on the “Solely outside the United States (SOTUS) exemption” from the proprietary trading and covered funds requirements of the Volcker Rule for such activity being conducted “solely outside the United States.” Revisions to the SOTUS exemption for proprietary trading include elimination of the prohibition that no financing for the banking entity’s purchase or sale be provided by any US branch or affiliate of the banking entity. With respect to the covered fund restrictions, in addition to eliminating the prohibition on US financing, the marketing prohibition on a non-US covered fund being offered or sold to US residents would be clarified to apply only if the offering actually is targeted at US residents.

• Other Proposed Changes

Other parts of the proposal also may benefit non-US banks currently subject to the Volcker Rule.  Some of the other highlights of the proposal include the following:

Compliance Programs: The Volcker Rule contains detailed compliance obligations. Under the proposal, Volcker Rule compliance program requirements would vary depending upon a banking entity’s average gross sum of trading assets and liabilities on a worldwide consolidated basis over the previous consecutive four quarters (“average gross sum”):

“Limited trading assets and liabilities”—Banking entities with an average gross sum of less than $1 billion would be presumed to be in compliance with the Volcker Rule and not be required to establish a Volcker Rule compliance program unless otherwise specifically ordered to do so by their primary federal regulator.

“Moderate trading assets and liabilities”—Banking entities with an average gross sum between $1 billion and $10 billion will be required to establish a more simplified compliance program than currently required, but still will need to comply with the current CEO attestation requirement that the banking entity does not, directly or indirectly, guarantee, assume or otherwise insure the obligations or performance of the covered fund or of any covered fund in which the covered fund invests.

“Significant trading assets and liabilities”—Banking entities with an average gross sum of $10 billion or more will be subject to the most detailed compliance program requirements, including written policies and procedures, internal controls, independent testing and audit obligations, and recordkeeping requirements, in addition to the CEO attestation requirement.

Definition of trading account: The proposal would eliminate the rebuttable presumption that a banking entity’s purchase or sale of a financial instrument is for its trading account if the banking entity holds the instrument for fewer than 60 days or substantially transfers the risk of the position within 60 days. The proposal would replace this presumption with a test based on the accounting treatment of the purchase or sale.

Permitted underwriting and market-making activities: Currently, underwriting and market-making transactions are permissible if they are designed “not to exceed reasonably expected near term demands of clients, customers or counterparties,” or RENTD. Revisions to this section would include creation of a presumption of compliance with the exemption if the banking entity establishes underwriting and market-making internal risk limits and implements, maintains and enforces those limits so they are not exceeded.

The risk-mitigating hedging exemption: Revisions of this exemption would include elimination of the requirement for a correlation analysis and reduction of certain enhanced documentation requirements.

Covered fund risk-mitigating hedging activities: Revisions would expand the ability of a banking entity to acquire a covered fund interest as a hedge when acting as an intermediary on behalf of a non-banking entity customer so long as, among other requirements, the action is designed to facilitate the exposure by the customer to the profits and losses of the fund.

Super 23A: Under the Volcker Rule statute, generally a banking entity that serves as an investment manager, investment adviser or sponsor to a covered fund may not enter into a transaction with that fund if the transaction would be considered a “transaction with an affiliate” for purposes of section 23A of the Federal Reserve Act. Section 23A imposes quantitative and qualitative restrictions on a bank’s transactions with its affiliates. However, Section 23A and its accompanying regulation, Federal Reserve Regulation W, contain a number of exceptions to this general rule. The Volcker Rule currently does not include any of these exceptions; the proposal seeks comments on whether such exemptions should be included.

The joint notice was published in the Federal Register, the official government publication for proposed and final federal government rules, agency notices and presidential documents, on July 17. Comments must be submitted on or before Sept. 17. The agencies pose over 340 questions for people to consider when formulating their comments.


While non-US banks may not be able to benefit immediately from EGRRCPA’s changes to systemic risk determinations and enhanced prudential requirements, the proposed changes to the Volcker Rule, if adopted, could bring material regulatory relief to those non-US banks engaged in Volcker Rule activity. Non-US banks thus should take full advantage of the chance to send comments on the proposed changes to the Volcker Rule.


Kathleen A. Scott is a senior counsel in the New York office of Norton Rose Fulbright.