Federal Reserve streamlines aspect of Volcker Rule compliance

WASHINGTON (Reuters) - The Federal Reserve announced Monday that it was streamlining part of its Volcker Rule compliance regulations, providing guidelines to banks seeking more time to start up and spin off new hedge funds and private equity funds.

FILE PHOTO: Flags fly over the Federal Reserve Headquarters on a windy day in Washington, U.S., May 26, 2017. REUTERS/Kevin Lamarque/File Photo

The Volcker Rule, named after former Federal Reserve chairman Paul Volcker, is part of the Dodd–Frank legislation introduced after the 2008 financial crisis, that seeks to restrict U.S. banks engaging in certain kinds of speculative investments, and is often referred to as a ban on proprietary trading by banks.

The Federal Reserve Board published new guidelines on Monday detailing how banks could apply for an extension for more time to complete a “seeding” investment in a hedge fund or private equity fund, before selling off its ownership as mandated by the Volcker Rule.

The Federal Reserve Board also said it would be allowing its 12 regional banks to approve those extension requests in most cases.

Monday’s tweak marks the second regulatory adjustment the Fed has made to the Volcker rule in the last week, as regulators eye a comprehensive review of the ban on proprietary trading and other risky bank behavior.

Under Volcker, banks are generally barred from holding major investments in hedge funds and private equity funds, in an attempt to insulate banks with federal deposit insurance from riskier trading activity.

One exemption to that ban is that banks are allowed to provide temporary “seeding” investments to help start up such funds, with the understanding that the bank’s investment would quickly shrink as outside investors join.

Typically, the rule requires banks to hold less than 3.0 percent ownership of a fund within a year of its creation, but banks can apply for up to a two-year extension with the Fed.

Monday’s guidelines detail exactly what steps a bank needs to take to apply for an extension, and what evidence it must provide to potentially receive one.

This tweak brings Volcker rule compliance in line with how the Fed handles other business, like general bank applications, by allowing regional banks to handle the bulk of the business with the board attending to more complex applications when necessary.

Reporting by Pete Schroeder