Accounting & Auditing

Implications of Final Volcker Rule

January 2013

On December 10, 2013, the Federal Reserve (Fed), Federal Deposit Insurance Corporations (FDIC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) issued the final rule implementing the Volcker Rule. The Volcker Rule generally prohibits banking entities from engaging in proprietary trading, acquiring or retaining ownership interest in a hedge fund or private equity fund—covered funds—and sponsoring a hedge fund or private equity fund. The final rule becomes effective April 1, 2014, with a conformance period that extends until July 21, 2015.

The final rule has some changes from the original 2011 proposal that may have significant unforeseen implications for banks holding certain investments. While the restrictions were intended to cover hedge funds and private equity funds, many securitization vehicles closely resemble hedge funds and private equity funds structurally. The final rule does not exempt all structures considered securitizations. The final rule also broadly defines “ownership interest” in covered funds, which may include interests usually considered to be debt instruments.

This paper summarizes only the portion of the final rule related to covered funds and highlights investments that will require additional review. An overview of impairment accounting rules is included, along with possible effects on a bank’s balance sheet classifications and net income.

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