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Volcker Rule
Securitization Issues
February 2014
Presented By
Jerry R. Marlatt
Kenneth E. Kohler
2
Volcker Rule
• On December 10, 2013, the federal banking agencies, the SEC and
the CFTC approved the final version of the Volcker Rule
• Very detailed release of almost 900 pages
• The rule, based on section 619 of Dodd-Frank, will substantially limit
the circumstances in which many banking entities may enter into
derivatives
• Because of prohibitions of trading activities, could substantially
reduce market liquidity
• The rule will prohibit sponsorship or ownership of same
securitizations
3
Volcker Rule (cont’d)
• The rule applies to a very broad range of banking entities, including
insured depository institutions, companies controlling an insured
depository institution, and companies treated as bank holding
companies, and any affiliate or subsidiary of any of the foregoing
• The general rule —
• a banking entity may not engage in “proprietary trading” except as permitted by
the rule.
• a banking entity may not acquire or retain any “ownership interest” in or sponsor a
“covered fund” except as permitted by the rule
• There is no grandfathering for ownership interests
4
Volcker Rule/Proprietary Trading
• Proprietary trading – “engaging as principal for” its own “trading
account” in a “purchase or sale of one or more financial instruments,”
including derivatives
• Definition of “trading account” incorporates concept of “short-term” resales, price
movements or arbitrage profits
• Definition of “financial instrument” includes most derivatives
• There is a rebuttable presumption that if a banking entity holds in its
trading account a financial instrument for less than 60 days, the
purchase or sale of such instrument is for the banking entity’s trading
account
5
Volcker Rule/Proprietary Trading (cont’d)
• Certain types of trading are excluded from the definition of proprietary
trading:
• Repo/reverse repo;
• Securities lending;
• Liquidity management pursuant to a plan;
• Derivative clearing organization (DCO) and clearing agency trades;
• Trades to satisfy an existing delivery obligation;
• Trades to satisfy a court, judicial or similar proceeding;
• Trades where the banking entity is acting solely as agent, broker or custodian;
• Trades through a deferred compensation plan; and
• Trades made in the ordinary course of collecting a debt previously contracted.
• No exclusion for interaffiliate trades
6
• The prohibition on proprietary trading also does not apply to:
• Trading in US government/agency securities;
• Trading in munis;
• Trading by a foreign bank sub of a US banking entity in debt of the foreign
government where the sub is located;
• Trading on behalf of a customer in a fiduciary or riskless principal capacity; or
• Trading by a banking entity that is a regulated insurance company
Volcker Rule/Proprietary Trading (cont’d)
7
Volcker Rule
• The prohibition on proprietary trading does not apply to certain risk-
mitigating hedging activities or certain market-making activities as
well as certain underwriting activities
• Permitted risk-mitigating hedging activities do not explicitly include a
“portfolio hedge”
• However, they do permit hedging activities that are:
• “in connection with and related to individual or aggregated positions, contracts
or other holdings” and
• “designed to reduce the specific risks to the banking entity” that are “related to
such positions, contracts or other holdings”
8
Volcker Rule/Hedging Activities (cont’d)
• Additional requirements for risk-mitigating hedging activities:
• An internal compliance program containing written policies and procedures
regarding positions, techniques and strategies that may be used for hedging,
including:
• Documentation indicating what positions, contracts or other holdings a
particular trading desk may use
• Position and aging limits
• Analysis designed to ensure that the positions, techniques and strategies that
may be used for hedging may be reasonably be expected to demonstrably
reduce or otherwise significantly mitigate the specific, identifiable risks being
hedged
• The extent of the required internal compliance program will depend upon the size
and activities of the relevant banking entity, but for entities engaging in proprietary
trading that have consolidated assets of $10 billion or more it will be quite
substantial.
• Rule is quite prescriptive with respect to reporting and recordkeeping
requirements.
9
• Additional requirements for risk-mitigating hedging activities:
• Activity must be conducted in accordance with written policies, procedures and
internal controls
• Activity must be designed to reduce or otherwise significantly mitigate and
demonstrably reduces or otherwise significantly mitigates one or more specific,
identifiable risks arising in connection with identified positions, contracts, or other
holdings
• Activity must not give rise, at the inception of the hedge, to any significant new or
additional risk that is not itself hedged contemporaneously
• Continuing review, monitoring and management that requires ongoing
recalibration of the hedging activity
• Compensation arrangements of persons performing risk-mitigating hedging
activities are designed not to reward or incentivize prohibited proprietary trading
• Additional documentation requirements apply with respect to risk-mitigating
hedging activities established by a trading desk other than the desk responsible
for the underlying positions, or to hedge aggregated positions across trading
desks
Volcker Rule/Hedging Activities (cont’d)
10
Volcker Rule/Market-Making Activities (cont’d)
• The prohibition on proprietary trading does not apply to certain
market-making activities;
• Requirements for permitted market-making activities:
• Trading desk that establishes and manages the financial exposure routinely
stands ready to purchase and sell one or more types of financial instruments
related to its financial exposure and is willing and available to quote, purchase and
sell, or otherwise enter into long and short positions in those types of financial
instruments for its own account in commercially reasonable amounts and
throughout market cycles
• The amount, types, and risks of the financial instruments in the trading desk’s
market-maker inventory are designed not to exceed, on an ongoing basis, the
reasonably expected near term demands of clients, customers, or counterparties
11
• Additional requirements for permitted market-making activities:
• Internal compliance program that states
• The instruments in which each trading desk will make a market
• Actions the trading desk will take to demonstrably reduce or otherwise
significantly mitigate promptly the risks of its financial exposure
• Limits for each trading desk, based on the nature and amount of the trading
desk’s market making-related activities
• Internal controls and ongoing monitoring and analysis of each trading desk’s
compliance with its limits
• Authorization procedures, including escalation procedures that require review
and approval of any trade that would exceed a trading desk’s limit(s)
• The compensation arrangements of persons performing the market-making
activities are designed not to reward or incentivize prohibited proprietary trading.
Volcker Rule/Market-Making Activities (cont’d)
12
Volcker Rule/Underwriting
• The market-making exception is permitted only if the trading desk
underwriting position is related to a “distribution” of securities for
which the bank is an underwriter
• Distribution: 33 Act registered, or otherwise characterized as different from
ordinary trading by virtue of selling efforts – Securities law terms
• Underwriter: defined broadly to include selling group members and other
distribution participants – Securities law terms
• Amount and type of securities in the underwriting position: cannot exceed the
reasonably expected near term demands of clients, customers, counterparties,
etc.
• The trading desk must use reasonable efforts to reduce the position within a
reasonable time
13
FBOs
• The rule establishes an exemption for proprietary trading by an FBO
to the extent that the trading is conducted solely outside the United
States (SOTUS exemption)
• SOTUS means
• FBO not organized under U.S. or State law
• majority of total assets held outside the U.S.
• majority of total revenues derived from business outside U.S.
• majority of total net income derived from business outside U.S.
• the personnel or affiliate that arrange, negotiate or execute the trade are not
located in the U.S. or organized under U.S. law
• the personnel who make the decision to trade are not located in U.S.
• the trade and any related hedging is not accounted for by any branch or affiliate
located in the U.S. or organized under U.S. law
14
FBOs (cont’d)
• no financing for the trade is provided by a branch or affiliate located in U.S. or
organized under U.S. law
• with certain exceptions, the trade is not conducted with or through a U.S. entity
15
“Prudential” backstop
• Proprietary trading activities are not permissible if:
• They involve or result in a material conflict of interest between the banking entity
and its clients, customers or counterparties, or
• They would result in a material exposure by the banking entity to a high-risk asset
or a high-risk trading strategy, or
• They pose a safety and soundness threat to the institution or a threat to US
financial stability
16
Covered funds
• The rule prohibits a banking entity, as principal, directly or indirectly
from acquiring or retaining an ownership interest in, or sponsoring, a
“covered fund”
• Does not apply to banking entity: solely acting as agent, broker or custodian and
the activity is conducted for the account of or on behalf of a customer and the
banking entity does not retain an interest; the banking entity’s ownership interest
is held/controlled by it as trustee in connection with a deferred comp or similar
plan; owns interest in the ordinary course of collecting a debt; or holds as trustee
or on behalf of a customer that is not itself a covered fund
• A “covered fund” is an issuer:
• that would be required to register as an investment company under the
Investment Company Act but for Section 3(c)(1) or 3(c)(7)
• any commodity pool
• CPO relies on an exemption from registration, or
• units in the fund are sold to QEPs and are not publicly offered
17
Covered funds (cont’d)
• For any banking entity that is, or is controlled by a banking entity that is, located in
or organized under the laws of the U.S., any entity —
• organized outside the U.S. whose ownership interests are offered and sold
solely outside the U.S.
• organized primarily for the purpose of trading in securities
• the banking entity sponsors or holds an ownership interest in the entity
18
Covered funds (cont’d)
• Exemptions from ‘covered fund’:
• Foreign public funds
• A U.S. banking entity can sponsor a foreign public fund under certain
circumstances
• Wholly-owned subsidiaries
• Joint ventures – not organized for purpose of trading
• Acquisition vehicles
• Foreign pension or retirement funds
• Insurance company separate accounts – no banking entity participates in profits or
losses
• Bank owned life insurance
• Loan securitizations
• Qualifying ABCP programs
• Qualifying covered bonds
19
Covered funds (cont’d)
• SBICs and public welfare investment funds
• Registered investment companies and excluded entities – but not excluded by
3(c)(1) or 3(c)(7)
• Entities organized by the FDIC in connection with a receivership
• Any other entity approved by the agencies
20
Covered funds (cont’d)
• The agencies expressly excluded certain entities from the definition
of covered fund.
• In some cases, these entities may be able to rely on exclusions from
the definition of investment company other than section 3(c)(1) and
section 3(c)(7)
• Entities include
• Financial market utilities
• Collateral cash pools
• Pass-through REITs
• Municipal securities tender option bond transactions
• Venture capital funds
• Credit funds
• Employee securities companies
21
Covered funds (cont’d)
• Scope of prohibition
• The basic prohibition is that banking entities are not permitted to “sponsor” or
acquire an “ownership interest” in a covered fund, subject to certain exceptions
• Sponsor means
• To serve as a general partner, managing member, trustee or CPO of a
covered fund
• To select or control selection of a majority of directors, trustees or
management of a covered fund
• To share with the covered fund the same name or a variation of the name
• Ownership interest
• Means any equity, partnership or other similar interest
• Other similar interest includes an interest in or security issued by a covered fund
that exhibits certain characteristics on a current, future or contingency basis
• Definition of ownership interest may include interests in a covered fund that
might not be considered an ownership interest or an equity interest in other
contexts
• Does not include “restricted profit interest”
22
Covered funds (cont’d)
• Permitted covered fund sponsorship and investments
• Notwithstanding the prohibition on sponsorship and investment in ownership
interests in covered funds, the rule permits investment and sponsorship of the
certain covered funds, subject to prescribed limitations and conditions
• Customer funds
• A BE may acquire ownership interests in or sponsor a covered fund, including
acting as a general partner, managing member, trustee or CPO as a means of
offering investment opportunities to customers
• Covered fund activity must be in connection with BE’s trust, fiduciary or investment
management services for customers pursuant to a written plan
• Conditions
• BE cannot guarantee performance of covered funds
• BE cannot share same name as covered fund
• BE directors and employees can take ownership interests
• BE must disclose certain information
23
Covered funds
• Permitted covered fund sponsorship and investments
• Customer funds
• Per-fund investment limitation
• BE’s investment in customer fund may not exceed either
• 3% of the value of the covered fund, or
• 3% of the number of ownership interests of the covered fund
• Seeding period
• BE may exceed the 3% limit during a seeding period of up to one year
• No quantitative or percentage limitation that BE may hold during seeding period
• Entities issuing asset-backed securities
• Ownership limitation exception for required risk retention rules
• Permissible underwriting and market making
• Restrictions do not apply to BE’s underwriting and market-making related
activities provided they conform to the requirements for permitted activities
under the proprietary trading prohibitions
• Aggregate value of covered fund investments may not exceed 3% of Tier 1 capital
24
Covered funds (cont’d)
• “Super 23A”
• BEs may not enter into with the funds discussed above (covered funds)
transactions that are “covered transactions” under Section 23A of the FRA
• No BE that (directly or indirectly) serves as investment manager, investment
adviser, CTA or sponsor of a covered fund may engage in any transaction
with the covered fund if the transaction would be a “covered transaction” as
defined in Section 23A, as if the BE or its affiliate were a “member bank” and
the covered fund were an affiliate
• Covered transactions include
• Loan or extension of credit (including repo)
• Purchase or investment of securities issued by affiliate
• Purchase of assets from the affiliate
• Acceptance of securities as collateral for a loan
• Issuance of guarantee, acceptance or LOC on behalf of affiliate
• Transaction with affiliate that involves borrowing or lending securities
• Derivative transactions
25
Covered funds (cont’d)
• “Super 23A”
• Volcker Rule imposes an absolute transactional prohibition, subject to explicit
exceptions
• Thus, we call the Volcker Rule’s 23A prohibitions “Super 23A”
• Exceptions
• Acquisitions of ownership interests in covered funds that are not proscribed to
the extent permitted elsewhere in the rule
• BEs, subject to certain conditions, may enter into prime brokerage
transactions with covered fund that is managed, sponsored or advised by the
BE or its affiliates
• Other permitted covered fund activities
• Permitted risk-mitigating hedging activities
• Fund investment and sponsorship by FBOs solely outside the U.S.
• Permitted fund activities by regulated insurance companies
• Prudential backstops
• Above activities not permissible if they result in material conflicts of interest
26
Securitization Overview
• The rule applies to banking entities involved as investors in,
sponsors of, or transaction parties (e.g., credit or liquidity providers)
with, securitization issuers are subject to severe restrictions or
divestiture if the securitization issuer is a covered fund.
• Congress stated in the Dodd-Frank Act its intention that the Volcker
Rule not limit or restrict the ability of banking entities to sell or
securitize loans.
• In the Final Rule, the Agencies generally followed Congressional
intent by making clear that most securitizations of traditional loan
products (e.g., mortgage loans, auto loans, student loans and credit
card receivables) are not covered funds.
27
Securitization Overview (cont’d)
• However, the Final Rule creates the possibility that certain
securitization vehicles whose assets include securities or derivatives
(as opposed to loans) may be covered funds.
• Banking entities must closely examine the securitizations with which
they are involved to determine if they are covered funds.
• If a banking entity has an investment in, sponsors, or engages in
certain transactions with a securitization vehicle that is a covered
fund, it must closely examine such relationships to determine if they
are permissible or require divestiture or restructuring.
• NOTE – there is no grandfathering of existing ownership interests
28
Definition of Covered Fund
• The basic definition of “covered fund” is a three-pronged test
previously described.
• For most securitization issuers, the relevant test will be that set forth
in the first prong of the definition – whether the issuer would be an
investment company under the 1940 Act but for the exemptions set
forth in Section 3(c)(1) or 3(c)(7) of the 1940 Act.
• Many securitizations rely on other exemptions from the 1940 Act and
are therefore not covered funds.
• A banking entity involved with a securitization should be able to
determine the applicable 1940 Act exemption by reviewing the
offering documents.
• If beneficial ownership of securities is limited to 100 or fewer persons, the deal
probably relies on Section 3(c)(1).
• If investors are required to be “qualified purchasers” for purposes of the 1940 Act,
the deal probably relies on Section 3(a)(7).
29
Definition of Covered Fund (cont’d)
• The Agencies have stated that a deal that relied on Section 3(c)(1) or
3(c)(7) may still not be a covered fund if another 1940 Act exemption
is also available.
• If a securitization issuer relied on 3(c)(1) or 3(c)(7), is another 1940
Act exemption available?
• Section 3(c)(5)(C) – for certain mortgage-backed securities
• Rule 3a-7 – for many traditional securitizations
• Section 3(c)(5)(A) – for certain securitizations of consumer receivables
• Section 3(c)(5)(B) – for certain securitizations of trade receivables
• Rule 3a-5 – for finance subsidiaries whose securities are guaranteed by parent
30
Exclusions from Covered Fund Definition – General
• If the issuer relied on Section 3(c)(1) or 3(c)(7) of the 1940 Act and
another 1940 Act exemption is not available, it may still avail itself of
one or more of the 14 enumerated exclusions from the definition of
covered fund.
• Of the 14 exclusions, four are most likely to be applicable to a
securitization issuer:
• Loan securitization exclusion
• Qualifying asset-backed commercial paper (ABCP) conduit exclusion
• Qualifying covered bond exclusion
• Wholly owned subsidiary exclusion
31
Loan Securitization Exclusion
• This exclusion applies to an issuer of ABS if its underlying assets are
comprised solely of:
• loans (defined as any loan, lease, extension of credit, or secured or unsecured
receivable that is not a security or derivative);
• rights or other assets designed to assure the servicing or timely distribution of
proceeds to security holders or related or incidental to purchasing or otherwise
acquiring, and holding loans, subject to certain limitations;
• certain interest rate or foreign exchange derivatives that (i) directly relate to the
loans in the issuing entity, the related ABS or certain related contractual rights or
assets and (ii) reduce the interest rate and/or foreign exchange risks related to
such loans, the related ABS or permitted contractual rights or assets;
32
Loan Securitization Exclusion (cont’d)
• certain special units of beneficial interest (“SUBIs”) and collateral certificates
(which are issued by certain intermediate special purpose vehicles that
themselves satisfy the requirements of the loan securitization exclusion); and
• certain securities constituting cash equivalents and securities received in lieu of
debts previously contracted with respect to the loans underlying the ABS.
• In addition, in order to qualify for the loan securitization exclusion, the
issuer may not hold (i) a security, including an ABS, or an interest in
an equity or debt security other than as permitted above; (ii) a
derivative, other than as permitted above; or (iii) a commodity forward
contract.
• The Agencies stated in the preamble that the determination whether
a loan or other financial asset is a “security” is made by reference to
the federal securities laws.
33
Qualifying ABCP Conduit Exclusion
• This exclusion applies to an issuer of asset-backed commercial paper
(ABCP) if the underlying assets are comprised solely of:
• loans or other assets that would be permissible under the loan securitization
exclusion described above, and
• ABS that are supported solely by assets permissible under the loan securitization
exclusion and are acquired by the ABCP conduit as part of the initial issuance of
the securities.
• In addition, to qualify for the qualifying ABCP conduit exclusion, a
“regulated liquidity provider” (as defined in the Final Rule) must
provide a legally binding commitment to provide full and
unconditional liquidity coverage with respect to all the outstanding
ABCP issued in the event that funds are required to redeem the
maturing ABCP.
34
Qualifying Covered Bond Exclusion
• This exclusion applies to an entity that owns or holds a dynamic or
fixed pool of assets that covers the payment obligations of covered
bonds if such assets or holdings meet the requirements of the loan
securitization exclusion.
• In addition, the covered bonds must be debt obligations that are
issued either directly
• by a foreign banking organization (“FBO”) (in which case, the payment obligations
of the covered bonds must be fully and unconditionally guaranteed by the entity
that owns the permitted cover pool) or
• by the entity that owns the permitted cover pool (in which case, the payment
obligations of the covered bonds must be fully and unconditionally guaranteed by
an FBO and the issuer of the covered bonds must be a wholly owned subsidiary
that satisfies the requirements of the wholly owned subsidiary exclusion
(described below) of the FBO.
35
Wholly Owned Subsidiary Exclusion
• This exclusion applies to an entity if all of its outstanding ownership
interests are owned directly or indirectly by a banking entity or an
affiliate thereof, except that:
• up to five percent of the entity’s ownership interests may be owned by directors,
employees, and certain former directors and employees of the banking entity or its
affiliates; and
• within the five percent ownership interest, up to 0.5 percent of the entity’s
outstanding ownership interests may be held by a third party if the ownership
interest is held by the third party for the purpose of establishing corporate
separateness or addressing bankruptcy or insolvency.
• This exclusion was added to the Final Rule to clarify that wholly
owned “depositors” and other intermediate transferors of assets in a
securitization are not considered covered funds. This exclusion is
also likely to be very helpful for banking entities that establish or rely
on special purpose funding programs that utilize trust or other tax
pass-through vehicles.
36
Covered Fund Problem Areas
• Most covered fund problems arise for Section 3(c)(1) or Section
3(c)(7) funds whose assets include securities or derivatives:
• CDOs backed by securities or derivatives (including CDOs backed by trust-
preferred securities (“TruPS”))
• CLOs that hold debt securities
• Certain CMOs backed by mortgage securities
• Resecuritizations
• Bond Repackagings
• Synthetic ABS
• Synthetic structured products
• Auction rate preferred securities
• Funding vehicles
• Domestic covered bonds
37
Covered Fund Restrictions
• If a securitization issuer is determined to be a covered fund, banking entities
are prohibited from:
• acquiring “ownership interests” in the securitization issuer,
• sponsoring the securitization issuer, and
• making loans to, or entering into certain other types of transactions with a
securitization issuer for which the banking entity acts as sponsor, investment
manager, investment adviser or commodity trading advisor.
• The prohibitions described in the third bullet point above are defined in the
Final Rule by reference to the restrictions of Section 23A and 23B of the
Federal Reserve Act, and are commonly referred to by commenters as the
“Super 23A” provisions. These restrictions, among other things, severely limit
the ability of banking entities to provide credit and liquidity support to covered
fund securitizations to which they are related as investors, sponsors or
advisors.
• Additionally, permitted transactions between the banking entity and the
securitization issuer must be on market terms.
38
Covered Fund Restrictions (cont’d)
• The Final Rule also includes a limited exemption from ownership and
sponsorship restrictions to the extent banking entities retain ownership
interests in sponsored securitizations not otherwise excluded from the
covered fund definition in order to comply with risk retention requirements.
• This exemption, however, does not exempt banking entities from Super 23A
restrictions. Additionally, the exemption does not apply if banking entities
retain ownership interests in excess of the required retention under risk
retention rules, defeating its utility in situations in which rating agencies or
prospective investors require a retention in excess of the regulatory risk
retention requirement.
• The Final Rule does not itself “grandfather,” or exempt, structures and
investments put in place before the effective date of the Final Rule or before
the enactment of the Dodd-Frank Act. Accordingly, banking entities will need
to closely examine their existing securitization investments and relationships,
and prospective transactions, for compliance with the Volcker Rule.
39
Definition of “Ownership Interest”
• An ownership interest includes any equity or partnership interest in a
covered fund or any other interest in or security issued by a covered
fund that exhibits any of certain characteristics on a current, future or
contingent basis, including:
• has the right to participate in the selection or removal of a general partner,
managing member, member of the board of directors, investment manager,
investment adviser or commodity trading advisor (not including rights of a creditor
to exercise remedies in the event of a default);
• has the right under the terms of the interest to receive a share of the income,
gains or profits of the covered fund (regardless of whether the right is pro rata with
other owners);
• has the right to receive the underlying assets of the covered fund, after all other
interests have been redeemed and/or paid in full (the “residual” in securitizations);
• has the right to receive all or a portion of excess spread;
40
Definition of “Ownership Interest” (cont’d)
• provides that the amounts payable by the covered fund with respect to the interest
could, under the terms of the interest, be reduced based on losses arising from the
underlying assets of the covered fund, such as allocation of losses, write-downs or
charge-offs of the outstanding principal balance, or reductions in the amount of
interest due and payable on the interest;
• receives income on a pass-through basis from the covered fund, or has a rate of
return that is determined by reference to the performance of the underlying assets
of the covered fund (excluding interests that are entitled to received dividend
amounts calculated at a fixed or floating rate); and
• any synthetic right to have, receive or be allocated any of the rights described
above (which would not allow banking entities to obtain derivative exposure to these
characteristics).
• Of particular importance to banking entities engaged in investment
banking activities, notwithstanding the general prohibition of a banking
entity acquiring an “ownership interest” in a covered fund, a banking
entity may acquire such an ownership interest in connection with
certain permitted underwriting and market making-related activities.
41
Definition of “Ownership Interest” (cont’d)
• It is also important to note that the definition of ownership interest in
the Final Rule may include interests in a covered fund that might not
usually be considered an ownership interest or an equity interest.
• Of particular concern is the first of the indicia of an ownership interest list above –
that the interest has the right to participate in the selection or removal of a general
partner, managing member, director, investment manager, investment adviser or
commodity trading advisor.
• Many CLOs and CDOs provide rights to a “controlling class” of senior debt
security holders to participate in the designation of investment managers or
investment advisers, creating the potential that the holders of even the most
senior, highly rated debt securities may be considered to hold “ownership
interests.”
• It is hoped that further regulatory guidance will clarify whether senior debt interests
in such structures are susceptible to classification as “ownership interests.”
42
Definition of “Sponsor”
• The Final Rule defines “sponsor” to mean any entity that:
• serves as general partner, managing member, or trustee of a covered fund, or that
serves as a commodity pool operator of a covered fund,
• selects or controls (or has employees, officers, or directors, or agents who
constitute) a majority of the directors, trustees, or management of a covered fund, or
• shares with a covered fund, for corporate, marketing, promotional, or other
purposes, the same name or a variation of the same name.
• A key question for trustees of ABS issuing trusts (which are typically appointed
by the party usually regarded as the sponsor of the securitization) is whether
such trustees may themselves be considered “sponsors” of the securitization.
• The Agencies stated in the Preamble that the term “sponsor” includes a trustee that
has the right to exercise any investment discretion with respect to the securitization.
• The Agencies also indicated that for ABS issuers, this would generally not include a
trustee that executes decision making, including investment of funds prior to the
occurrence of an event of default, solely in accordance with the provisions of a
written contract or at the written direction of an unaffiliated party.
43
Interim Final Rule re TruPS CDOs
• The Final Rule caused considerable industry outcry over the definition
of “ownership interest” as applied to CDOs and CLOs—particularly from
community banks that hold CDOs backed by trust preferred securities
(“TruPS”).
• On January 14, 2014 the Agencies issued an interim final rule providing
grandfathering for certain existing TruPS CDOs.
• The interim final rule allows the retention of an interest in or sponsorship
of covered funds by banking entities if, among other things, the following
conditions are met:
• The TruPS CDO was established, and the interest was issued, before May 19, 2010;
• The banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in qualifying TruPS collateral; and
• The banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the Agencies issued the Final Rule implementing the Volcker Rule.
44
Thank You!
