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Volcker Rule Revised in Response to Concerns of Smaller Banks

On December 10, 2013, five agencies, the Board of Governors of the Federal Reserve Board (“Federal Reserve”), the Commodity Futures Trading Commission (“CFTC”), the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“OCC”), and the Securities and Exchange Commission (“SEC”), promulgated a 71-page Final Rule to implement the Volcker Rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act.1 The new regulation was immediately under challenge. On December 24th, the American Bankers Association (“ABA”), a banking trade group headquartered in Washington, DC, filed a lawsuit in the United States District Court for the District of Columbia against FDIC, OCC and Federal Reserve, seeking injunctive relief to void part of the Final Rule.2

The Volcker Rule refers to § 619 of the Dodd-Frank Act.3 It was named after its proposer, the former chairman of United States Federal Reserve, Paul Volcker. The Volcker Rule was introduced to prevent banks in the United States from engaging in proprietary trading and investing in private equity or hedge funds with their depositors’ money.4 This ex ante restriction on bank activities was a response to the financial crisis in 2008, when the government used taxpayers’ money to bail out large banking institutions that were considered too big to fail for their risky behavior.

The second prohibition was at issue in the case. The statute provides that banks may not “acquire or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund.”5 The complaint claimed that the Final Rule dramatically expanded definition of “ownership interest” to a list of items, which covers collateralized debt obligations backed by trust-preferred securities, commonly referred to as “TruPS-backed CDOs.”6

Meanwhile, many community banks hold such CDOs they purchased before the financial crisis, and despite the fall of market value of such instruments during the financial crisis, they expected to receive improving returns in the long run as the economy improved. Under the Final Rule, these banks would have to rid themselves of TruPS-backed CDOs by April 1, 2014.7. ABA claimed that it would substantially harm the interests of these banks.8 According to the complaint, 275 banks would suffer from this expanded definition, with an estimated $600 million loss in capital.9

In response, the regulators reviewed the provision and issued an interim final rule on January 14, 2014. The revised rule provides a broad exemption for banks that invested in TruPS-backed CDOs issued by banks with less than $15 billion in assets before May 19, 2010, and acquired before Dec. 10, 2013.10

Subsequently, the plaintiffs withdrew their motion for preliminary injunction on January 15, 2014. However, the plaintiffs have not yet dismissed their case. In a press release, Frank Keating, ABA President and CEO, indicated that the group still needed time to work with its membership in analyzing the impact of the interim final rule before withdrawing the lawsuit.11

It is unlikely ABA will drop the lawsuit soon. Banking groups, scholars and lawmakers have fiercely criticized the Volcker Rule on various issues.12 The alleged disastrous impact on small banks of the December 10 Final Rule’s treatment of TruPS-backed CDOs was only one of the concerns. Indeed, the regulators’ speed in revising the Volcker Rule regulations shows some flexibility in the rules and the regulators’ responsiveness. Meanwhile, Mr. Keating indicated in a press release from the ABA that they “look forward to continuing to work with the regulators to ensure that the implementation of the . . . Volcker Rule is well reasoned and workable.”13 The goal of ABA’s lawsuit is thus not only limited to resolving the issue of TruPS-backed CDOs, but the reasonable implementation of the Volcker Rule as a whole, not to mention that the ABA has not yet come to a conclusion on the workability of the interim final rule.

  1. Press Release, Bd. of Governors of the Fed. Reserve Sys., Commodity Futures Trading Comm’n, Fed. Deposit Ins. Corp., Office of the Comptroller of the Currency & Sec. and Exch. Comm’n, Agencies Issue Final Rules Implementing the Volcker Rule (December 10, 2013), The text of the final rules as well as the preamble is available at

  2. Compl., Am. Bankers Ass’n, et al v. FRS, et al., 2013 WL 6908173 (D.D.C.)(No. 13-2050). 

  3. 12 U.S.C. § 1851. 

  4. 12 U.S.C. § 1851(a)(1). 

  5. 12 U.S.C. § 1851(a)(1)(B). 

  6. Compl. at 8, 2013 WL 6908173; “[a] trust-preferred security is created when a bank issues debt to a trust created by that bank, and then sells its right to receive interest and principal payments on that debt to third-party investors. A TruPS-backed CDO is created when a financial firm purchases multiple trust-preferred securities, packages those securities into a single security, and sells new debt interests in that single security to investors.” Compl. at 11, 2013 WL 6908173. 

  7. Final Rule pmbl. 1 (December 10, 2013),

  8. Compl. at 3, 2013 WL 6908173. 

  9. Id

  10. Press Release, Bd. of Governors of the Fed. Reserve Sys., Commodity Futures Trading Comm’n, Fed. Deposit Ins. Corp., Office of the Comptroller of the Currency & Sec. and Exch. Comm’n, Agencies Approve Interim Final Rule Authorizing Retention of Interests in and Sponsorship of Collateralized Debt Obligations Backed Primarily by Bank-Issued Trust Preferred Securities (January 14, 2014),

  11. Press Release, Am. Bankers Ass’n, Agencies ABA Statement on TruPS Litigation (January 15, 2014),

  12. See William Alden, War of Words Over the Volcker Rule: A History (December 10, 2013),

  13. Press Release, Am. Bankers Ass’n, ABA Statement on TruPS Interim Final Rule (January 14, 2014),