OCC Bulletin: Volcker Rule: Interim Examination Procedures

Summary

The Office of the Comptroller of the Currency (OCC) is issuing interim procedures for examiners to assess banks’ progress in developing a framework to comply with requirements of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations adopted by the OCC with the other rule-writing agencies. Section 619, commonly known as the Volcker Rule, prohibits national banks (other than certain limited-purpose trust banks), federal savings associations, and federal branches and agencies of foreign banks (collectively, banks) from engaging in short-term proprietary trading of financial instruments and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds (also known as covered funds).

Highlights

Because of the Volcker Rule’s complexity, the OCC developed these interim examination procedures to help examiners understand and focus on the rule’s key aspects and to work with banks during the conformance period to measure progress toward achieving compliance by July 21, 2015. The procedures emphasize

identification of activities subject to the rule.
assessment of banks’ progress toward establishing their compliance programs.
evaluation of banks’ plans for conforming covered fund securitization, asset management, and sponsorship activities.
banks’ progress in being able to report quantitative metrics.

The OCC will supplement these procedures during the conformance period with in-depth procedures for examiners to test banks’ compliance on an ongoing basis.

Note for Community Banks

Community banks that do not engage in trading activities covered by the regulations, or make investments subject to the regulations, have no compliance obligations and are not subject to these procedures.

Background and Summary

The regulations became effective April 1, 2014, and banks must bring their activities and investments into conformance with the regulations by July 21, 2015. ¹ Banks with trading assets and liabilities of $50 billion or more on a worldwide consolidated basis (excluding trading assets and liabilities involving U.S. government and agency obligations) must begin collecting quantitative metrics on July 1, 2014, and report these metrics to the OCC on September 2, 2014. ²

The regulations’ compliance program requirements vary according to banks’ total consolidated assets.

Simplified compliance programs: Banks with total consolidated assets of $10 billion or less can satisfy the regulations’ simplified compliance program requirements by including in their existing compliance policies and procedures appropriate references to the requirements of the regulations, and adjustments, as appropriate, given the banks’ activities, size, scope, and complexity.
Standard compliance programs: Banks with total consolidated assets greater than $10 billion and less than $50 billion, unless they report metrics, must develop and administer standard compliance programs that include, among other things,
- written policies and procedures reasonably designed to document, describe, monitor, and limit permitted trading and covered fund activities.
- a system of internal controls reasonably designed to monitor compliance with and to prevent the occurrence of activities or investments prohibited by the regulations.
- a management framework that clearly delineates responsibility and accountability for compliance with the regulations.
- independent testing and audit of program effectiveness.
Enhanced compliance programs: Banks with total consolidated assets of $50 billion or more, or that report metrics, must establish, maintain, and enforce enhanced compliance programs, which are more prescriptive than standard programs. An enhanced program requires additional documentation demonstrating the bank’s compliance with the Volcker Rule. Crucially, the enhanced compliance program must include annual independent testing by qualified personnel, likely internal auditors.

Banks that do not invest in or sponsor covered funds and limit their proprietary trading to eligible government securities are not required to have compliance programs. If their business plans change, such banks can comply with the regulations by establishing required compliance programs before becoming engaged in covered activities.