Regulators to review applicability of Volcker Rule to TruPS-backed debt obligations

126px-US-FederalReserveSystem-Seal.svg_3Regulators said on Friday that they would review whether collateralized debt obligations backed by trust preferred securities should be subject to the controversial Volcker Rule under the Dodd-Frank Act.

The Volcker Rule—finalized by regulators on Dec. 10—prohibits banking firms from engaging in proprietary trading and from sponsoring or investing in hedge and private equity funds, referred to as “covered funds.”

Effective April 1, banking entities will be required to implement policies, processes and controls related to hedging, market-making and underwriting activities, and to restructure and limit certain investments in covered funds.

Under a separate provision of Dodd-Frank, trust preferred securities—or TruPS—issued by holding companies with less than $15 billion in assets must be phased out of the calculation of Tier 1 capital levels. TruPS issued before May 19, 2010, however, are permanently grandfathered.

The Federal Reserve, FDIC, OCC and SEC said they would address the issue by Jan. 15. The announcement follows concerns voiced by community banks that the final rule implementing the Volcker Rule conflicts with Congress’ determination to grandfather TruPS.

“The agencies are currently reviewing this matter and are considering whether it is appropriate and consistent with the provisions of the Dodd-Frank Act not to subject pooled investment vehicles for TruPS… to the prohibitions of ownership of covered funds in [the Volcker Rule]…” the regulators said. “The agencies are therefore evaluating whether it is appropriate to not cover pooling vehicles that invest in TruPS in order to eliminate restrictions that might otherwise have consequences that are inconsistent with the relief Congress intended to provide community banking organizations.”

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