UnderstandingtheVolckerRule:

g
CoveredFundsand
ProprietaryTradingProhibitions

AdamGale
Adam Gale
Chadbourne&ParkeLLP
agale@chadbourne.com
(212) 4085196
(212)408 5196
1
 Presenter AdamGale
Presenter Adam Gale
AdamGale,CounselintheNewYorkofficeofChadbourne&Parke
Ad G l C l i th N Y k ffi f Ch db &P k
LLP,specializesinregulatoryandcomplianceissuesforbanks,
brokerdealers,hedgefunds,privateequityfunds,commodity
traders and registered investment companies Heisafrequent
tradersandregisteredinvestmentcompanies. He is a frequent
writerandspeakeronregulatoryissues,includingissuesrelatingto
theDoddFrankActandtheVolckerRule. Adamistheheadof
Chadbourne'sshedgefundpracticeandrepresentsbothestablished
Chadbourne hedge fund practice and represents both established
hedgefundandprivateequityfundmanagersandstartupentities
infundstructureandformation,aswellasanumberofmajor
j g ,
investorsintofunds. PriortojoiningChadbourne,AdamwasSenior
CounselatTheBankofNewYork(nowBNYMellon). Hewas
recentlycalledontoadvisetheOfficeoftheComptrollerofthe
CurrencyonissuesrelatingtotheVolckerRule. Adamhas
representedbothlargeandsmallU.S.andforeignbanking
institutionsonU.S.bankregulatoryissues.

2
 Chadbourne & Parke LLP
Chadbourne&ParkeLLP
Chadbourne&ParkeLLPisaninternationallawfirmwith12offices
Ch db & P k LLP i i t ti l l fi ith 12 ffi
aroundtheworld. Sinceitsfoundingin1902,Chadbournehasbeen
dedicatedtoprovidingpracticalbusinesssolutionstoadiverse
range of clients in virtually all areas of law emphasizing private
rangeofclientsinvirtuallyallareasoflaw,emphasizingprivate
equityandhedgefundformation,investmentmanagement
regulatoryandcompliance,bankregulation,M&A,
corporate/corporate finance, U.S. and international tax, bankruptcy
corporate/corporatefinance,U.S.andinternationaltax,bankruptcy
andfinancialrestructuring,energy/renewableenergy,project
finance,insurance/reinsurance,intellectualproperty,commercial
p y g , g g y
andproductliabilitylitigation,securitieslitigationandregulatory
enforcement,antitrust,realestateandcommunications.In
additiontotheU.S.andNorthAmerica,majorgeographicalareasof
concentrationincludeLatinAmerica,WesternEurope,Centraland
EasternEurope,RussiaandtheMiddleEast.

3
 Structure of Volcker Rule
Consists of two general prohibitions:
1. Covered Funds Prohibition
Banking entities may not sponsor or
acquire an interest in covered
covered funds
funds
2. Proprietary Trading Prohibition
B ki entities
Banking titi may nott engage in
i
proprietary trading

4
 Agenda
I. CurrentStatusandWhoisCovered
II. CoveredFundsProhibition
Covered Funds Prohibition
III. IssuesforNonU.S.BanksUnderthe
C
CoveredFundsProhibition
d d hibi i
IV. ProprietaryTradingProhibition
p y g
V. CompliancePrograms

5
II.CurrentStatusand
Current Status and
WhoisCovered

6
 Proposed Rules
ProposedRules
VolckerRulewasenactedas 619oftheDoddFrank
Act in July 2010
ActinJuly2010.
Thespecificprovisions,however,mustbesetforthin
p g y g ,
Rulestobepromulgatedbyvariousregulators,most
notablytheBoardofGovernorsoftheFederal
Reserve.
TheFedissuedProposedRulesinOctober2011.
h d d d l b
Thousandsofcommentlettersweresubmitted.
AwaitingtheFinalRules,whichweredueonJuly21,
h l l h h d l
2012.FinalRulesarelikelytobeissuedwithinthe
next few months
nextfewmonths.
ThispresentationanalyzestheProposedRules.

7
 Effective Date and Conformance Periods
UndertheDoddFrankAct,theVolckerRulesprohibitionsweresupposed
to become effective
tobecome effective onJuly21,2012,eveniftheRuleswerenotyet
on July 21 2012 even if the Rules were not yet
finalizedbythatdate.
CompliancewiththeVolckerRule,however,isnotrequiredasofthe
effective date Instead the Volcker Rule provides for a twoyear
effectivedate.Instead,theVolckerRuleprovidesforatwo yeartransition
transition
period(conformanceperiod)fromtheeffectivedate,duringwhich
bankingentitiesmustbringalloftheiractivitiesincompliancewithallof
theVolckerRuleprohibitions.
FedhasmadeclearthattheconformanceperiodendsonJuly21,2014.
Itwasinitiallyunclearwhetherbankingentities,duringthetwoyear
co o a ce pe od, cou d t ate e act t es t at ou d be p o b ted
conformanceperiod,couldinitiatenewactivitiesthatwouldbeprohibited
undertheVolckerRule.
InApril2012,theFedissuedguidancethatbankingentitiesmaycontinue
toengageinprohibitedactivities,includinginitiatingnewactivitiesthat
g g p , g g
wouldbeprohibited,untilJuly21,2014.
Bankingentitiesneedtobecareful,however,thatanynewactivitiescanin
factbewounduppriortoJuly21,2014.

8
 Who is Covered:
Definition of Banking Entity
Any insured depository institution (as defined in 3 of the Federal Deposit
Insurance Act);
any company that controls an insured depository institution;
an
any company
compan that is treated as a bank holding company
compan for purposes
p rposes of 8
of the International Banking Act of 1978;
any affiliate of the above and
any subsidiary of the above.

Includes any non-U.S.

non U S bank with a U.S.
U S branch or agency office
office, or that
operates a New York Article XII investment company subsidiary, and any
affiliate.

Definition of "banking entity" excludes an institution that functions solely in a

trust or fiduciary capacity and meets a number of other requirements,
including that all or substantially all of the deposits of the institution are in
trust funds and received in a bona fide fiduciary capacity.
9
 Definition of Banking
Banking Entity
Entity

Bank Holding Company Act control principles apply in determining whether

an affiliate is a banking entity.
- Accordingl
Accordingly, an affiliate includes
incl des anyone
an one that owns
o ns 25% or more of the
voting securities of another entity. The affiliate definition therefore picks up
more entities than one might normally think of as affiliates.

Affiliates or subsidiaries of banks that are asset managers or other

investment advisers are included in the definition of banking entity
- But a banking entity is allowed to solely act as an investment adviser to a
fund.
Under the Proposed Rules
Rules, a banking
banking entity
entity does not include a private
equity fund or hedge fund that qualifies for the so-called asset
management permitted activity.
- Thus,
Thus a hedge fund sponsored by a banking entity can engage in proprietary
trading.
10
II.CoveredFundsProhibition

11
 Summary of Covered Funds Prohibition
Banking entities are prohibited from:
i or
sponsoring,
investing in (acquiring or retaining an ownership interest in)
a hedge fund,
fund private equity fund
fund, and numerous other types of privately
offered funds and pooled investment vehicles (referred to as covered
funds in the Proposed Rules),
except for funds that are organized and offered by the banking entity,
subject to:
o (a) the banking entity owning no more than 3% of the covered fund;
o (b) an overall limit of 3% of the banking entity's tier 1 capital
invested in covered funds; and
o (c) numerous other limitations,
limitations such as to the name of the fund
fund.
In addition, the banking entity may make seed investments in a fund,
including owning 100% of a fund, for up to one year.

12
Summary of Covered Funds Prohibition
Restrictions on Transactions With Affiliated Covered Funds
(Super 23A Provision):
- Any banking entity that sponsors a covered fund,
- an investment
i t t adviser
d i tto a covered
d ffund
d
(even if it does not otherwise sponsor the fund), and
- any affiliate:
may not enter into a transaction with the fund that would be a
"covered transaction" as defined under Federal Reserve Act
Section 23A, and must also comply with Federal Reserve Act
Section 23B,
exceptt that
th t the
th Federal
F d lR Reserve may allow
ll prime
i
brokerage transactions if certain requirements are met.

13
 Definition:CoveredFund
The Act prohibits investments in a hedge fund or a private equity
fund.
Proposed Rules prohibit investments in a covered fund, but the
definitions in both the Act and the Proposed Rule are almost identical:
An issuer that would be an investment company as defined in the
Investment Company Act of 1940 (the '' '40 Act"), but for section 3(c)(1)
or 3(c)(7) of the 40 Act.
Proposed Rules add two other categories to the definition of covered
fund:
o A commodity
commodity pool
pool , as defined in section 1a(10) of the Commodity
Exchange Act; and
o An issuer organized outside the U.S. that would be a covered fund if
organized in the U.S. or offered to U.S. residents.
Regulators also have the ability to later add to the definition of covered
fund any other entity that is a similar
similar fund
fund .

14
 Covered Fund Definition:
Effect on Other Types of Transactions
Almost all hedge funds and traditional private equity funds rely on the '40 Act exemptions
from registration under sections 3(c)(1) (100-investor
(100 investor limit) or 3(c)(7) (all investors must
be "qualified purchasers").

Beyond hedge funds and private equity funds, many other types of privately offered
f d and
funds d entities
titi also
l relyl on th
these exemptions,
ti iincluding
l di ththe ffollowing:
ll i
o most venture capital funds (there is no exemption in the Volcker Rule for VC funds);
o many real estate funds (there is no exemption in the Volcker Rule for RE funds);
o some types of special purpose vehicles used in project finance transactions; and
o some structured finance vehicles (such as CLOs and CDOs).

Effect of the definition of covered funds is that in any transaction in which a banking
entity
tit is
i iinvolved
l d and d th
thatt iis using
i a privately
i t l offered
ff d entity
tit th
thatt iis relying
l i on th
the 40 A
Actt
exemptions, the banking entity will need to determine if the Volcker Rule prohibits the
banking entitys involvement.

For example, a banking entity could not invest in a real estate fund that is relying on the
3(c)(1) or 3(c)(7) exemption, without meeting the other requirements of the covered
funds regulations.

15
 Covered Fund Definition:
Effect on Tax Equity Transactions
Another example of the Volcker Rules unexpected reach is that some bank
investments as tax equity participants
investments, participants, in renewable energy projects could run
afoul of the Volcker Rule, depending on how the transactions are structured.
If a banking entity invested directly into an entity that developed energy
projects (or invested into a holding company that owns project companies)
companies),
there would be no problem because the bank would be investing into an
operating company, which would not be relying on a 40 Act exemption.
If,
If hhowever, a b
banking
ki entity
tit formed
f d an intermediate
i t di t entity,
tit and d that
th t
intermediate entity then invests into a project company, the intermediate entity
might be a covered fund, depending on the structure, because it is likely that
the intermediate entity would be relying on the 3(c)(1) or 3(c)(7) exemption
under the 40 Act.
This type of structure is often used when the banking entity is acting as a
syndicator
di t off ttax equity
it iinvestments,
t t and
dhhas one or more unaffiliated
ffili t d investors
i t
in the intermediate entity.

16
 Definition: "Sponsoring"
Sponsoring a Fund
"Sponsoring" a fund is defined as:
serving as a general partner, managing member, or trustee of a covered fund;
(Proposed Rules add serving as a commodity pool operator)
in any manner selecting or controlling (or having employees, officers, directors
or agents who constitute) a majority of the directors, trustees or management of
a fund; or
sharing with a fund, for corporate, marketing, promotional, or other purposes,
the same name or a variant of the same name.

Note that solely acting as an investment adviser to a fund, but not otherwise
investing in the fund or acting in any other capacity (such as acting as a GP), is
allowed ((and the adviser mayy receive carried interest),
), as long
g as the adviser
does not share with the fund the same name or a variant of the same name.

Merely advising a fund, however, subjects the adviser (if it is a "banking entity")
and its affiliates to the Federal Reserve Act Section 23A and 23B restrictions on
transactions with the fund (discussed below).

Proposed Rules clarify that trustee does not include a trustee that has no
investment discretion with respect to a covered fund.
17
 Definition: Ownership
Ownership Interest
Interest
Act did not define ownership interest but the Proposed Rules define it as:
any equity, partnership or other similar interest (including a GP interest,
warrant, and option) in a covered fund, whether voting or nonvoting,
or any derivative of such interest.

N
Note
t that
th t the
th addition
dditi off a derivative
d i ti off suchh interest
i t t in
i the
th Proposed
P d Rule
R l
means that banks need to be careful about acquiring swaps or other types of
derivatives that would give the bank an economic interest in a covered fund.

Proposed Rules specifically exclude carried interest - an interest in the

share of the performance allocation - if the banking entity (including its
affiliates and employees) meet a number of requirements:
o serving as the investment manager/adviser or commodity trading adviser;
o sole purpose of the interest is to share in the profits for performance
compensation for services provided (but a clawback obligation (i (i.e.,
e obligation
to return profits) is allowed);
o the profits are distributed promptly, or if not so distributed, the banks
e ested profit
reinvested p o t does notot sshare
a e in tthe
epprofits
o ts aand
d losses
osses o
of tthe
e co
covered
e ed fund;
u d;
o the banking entity does not pay for its interest; and
o the interest is not transferable, except to affiliates. 18
 3% Limitations
Subject to a long list of further limitations (listed below), a
banking entity may acquire an ownership interest in a fund fund,
if:
it organizes and offers the fund
(so it cannot simply be a passive investor);
its investment is not more than 3% of the total ownership
i t
interests
t in
i any single
i l covered d ffund
d
(subject to an exception for the first year only); and
the aggregate value of all of its ownership interests in all
covered funds does not exceed 3% of the banking entity's
tier 1 capital (i.e., its regulatory capital).

19
 3% Limitations
Proposed Rules add further requirements as to which investments must
be included in calculating g the 3% limitation in any
y single
g fund and must
include:
interests in the fund held by an entity that is controlled, directly or
indirectly, by the banking entity;
its pro rata share of interests held by a covered fund that is not
controlled by the banking entity, but in which the banking entity owns
or controls more than 5% of the voting shares; and
co-investments with a covered fund organized by the banking entity.

In addition,
addition under the Proposed Rules,
Rules in calculating 3% limitation in
any single fund, the banking entity must use either the percentage of
(A) capital contributions; or (B) ownership interests, whichever is
greater.
Note this could cause an issue for a PE fund if an investor is excused
from certain investments, causing the banks contributions to exceed
3%, even if its commitment equals 3%.
20
 Seed Investments Permitted for One Year
Subject to the further limitations set forth below, a banking entity may
provide a fund with 100% of its initial equity "to
to permit the fund to attract
unaffiliated investors," provided that:
within one year of the fund's establishment, the banking entity must
reduce its ownership to no more than 3% of the total ownership
interests in the fund, through redemption, sale or dilution (or other
methods); ); and
the one-year limit may be extended for up to two additional years,
upon a banking entity's application and approval by the Federal
Reserve if it finds that an extension would
would be consistent with safety
and soundness and in the public interest.

21
 Seed Investments Permitted for One Year
Proposed Rules provide further guidance on extension applications:
Must
M b
be submitted
b i d 90 d days prior
i to theh endd off the
h one-year period;
i d
Explain the plan for reducing the investment in the covered fund;
Fed will consider a number of factors in reaching its decision
decision,
including:
o whether the investment would result in a material exposure by the
banking entity to high-risk assets or trading strategies;
o whether the investment would involve material conflicts of interest
between the banking entity and its clients
clients, customers and
counterparties; and
o the banking entitys prior efforts to reduce its interests in the fund.

22
 Other Requirements
In order to be able to use the 3% limit and the seed investment exceptions, the banking
entity must comply with all of the following requirements:
provide bona fide trust, fiduciary, or investment /commodity trading advisory services;
organize and offer the fund only in connection with the provision of such services, and
only to persons who are customers of such services of the banking entity;
o Note: Fed has clarified that customers includes prospective investors, even if they
have no current relationship with the banking entity.
p y with the Federal Reserve Act Section 23A and 23B restrictions
with its affiliates, comply
on transactions with such funds (discussed below);
not, directly or indirectly, guarantee, assume or otherwise insure the obligations or
performance of the fund, or of any fund in which such fund invests;
not share with the fund, for corporate, marketing, promotional or other purposes, the
same name or a variant of the same name (and the fund cannot use bank in its name);
not allow any director or employee of the banking entity to take or retain any ownership
interest in the fund, except for any director or employee who is directly engaged in
providing investment advisory or other services to the fund; and
disclose to prospective and actual investors in the fund, in writing, that any losses in
suchh ffund
d are b
borne solely
l l bby iinvestors
t iin th
the ffund
d and
d nott b
by th
the b
banking
ki entity,
tit along
l
with other required disclosures.
23
 Further Limitations on Permitted Activities
In order to engage in any "permitted activity" under the covered funds rules, no
transaction, class of transactions or activity may:
o involve or result in a material conflict of interest between the banking entity
and its clients, customers, or counterparties;
o result, directly or indirectly, in a material exposure to high risk assets or high
risk trading strategies (defined in the Proposed Rules as significantly
increasing the likelihood that the bank would incur a substantial financial loss
or would fail); or
oppose a threat to the safety y and soundness of such banking g entity
y or to the
financial stability of the U.S.
Proposed Rules provide that a material conflict exists if the banking interests
are materially adverse to the client
client, customer or counterparty with respect to
the transaction, unless either:
o the banking entity timely discloses the conflict in advance, in a manner
allowing the other party to negate or mitigate the adverse effect; or
o the banking entity has established and maintained information barriers in
written policies and procedures designed to prevent the conflict from resulting
in a material adverse effect on the other party
Note that the bank may not rely on the information barriers if it should reasonably
know that the conflict may materially adverse effect the other party. 24
 Other Permitted Activities
In addition to the permitted 3% limitation, the Act includes an exception for
investments in certain covered funds organized outside of the U.S.
(Non-US exemption is discussed in detail below.)
Proposed Rules include a number of new exceptions as other permitted
activities:
o Investments
I t t in
i SBICs;
SBIC
o Investments to promote the public welfare under 12 U.S.C. 24;
o Qualified rehabilitation expenditures with respect to building rehabs;
o Risk-mitigating
Risk mitigating hedging activities
- Acting as intermediary for non-bank customer to facilitate customers
exposure to profits and losses of the covered fund; or
- Connected to a compensation arrangement with bank employee who
directly provides investment advisory or other services to the fund
- A number of other requirements apply, including: establishing compliance
controls; mitigating exposure to the covered fund through an offsetting
exposure; and documenting at time of the transaction the risk-mitigating
purpose.

25
 Further Permitted Activities
Proposed Rules further allow sponsoring, or acquiring an ownership interest in:
A covered fund that issues asset-backed securities, so long as funds assets
are solely
l l comprised
i d of:
f
o Loans;
o Contractual rights or assets arising from loans supporting ABSs; or
o Interest rate or FX derivatives relating to terms of loans or contractual
rights, and used for hedging purposes.
A jjoint
i t venture
t b
between
t the
th banking
b ki entity
tit and
d any other
th person, if theth JV is
i an
operating company, and does not engage in other prohibited activity.
An acquisition vehicle for the purpose of a merger or acquisition.
An issuer of ABS, but only as to the portion of the credit risk that is retained by
a banking entity that is a securitizer or originator.
A wholly-owned
wholly owned subsidiary of the banking entity that performs liquidity
management activities and carried on the banking entitys balance sheet.
Investments in certain bank-owned life insurance separate accounts.
A
Acquiring
i i an iinterest
t t iin a covered
d ffund
d iin th
the ordinary
di course off collecting
ll ti a
debt (so long as bank subsequently divests its interest within one year).
26
Extended Transition Period for "Illiquid
Illiquid Funds"
Funds
The Federal Reserve may, upon application by any
b ki entity,
banking i extend d the
h transition
i i period
i d ffor that
h
particular banking entity:
for
f up to t a maximum
i off 5 years (which
( hi h iis iin addition
dditi tto
the 2-year transition period)
- so could extend until July 21,21 2019; and
to the extent necessary to fulfill a contractual obligation
that was in effect on May 1, 2010 to take or retain any
ownership interest in, or otherwise provide additional
capital to, an "illiquid fund. "

27
Extended Transition Period for "Illiquid
Illiquid Funds"
Funds
An "illiquid fund" is defined as a covered fund that:
o as of May 1, 1 2010,
2010 was principally invested in in, or was invested and
contractually committed to principally invest in, "illiquid assets"; and
o makes all investments pursuant to, and consistent with, an
i
investment
t t strategy
t t to
t principally
i i ll invest
i t in
i illi
illiquid
id assets.
t

Proposed Rules include a definition of illiquid assets, which

includes any asset that is: not cash; not traded on an exchange;
and does not have an initial term of one year or less.
Most pprivate equity
q y funds ((which invest in p portfolio companies),
p ), as
well as real estate funds and venture capital funds, presumably
would be able to obtain the extension.
Very few hedge funds would fit within the definition of "illiquid
illiquid fund
fund,"
as the investment strategy of most hedge funds is to principally
invest in liquid, rather than illiquid, assets.

28
Potential Alternative for Bank Investments
PotentialAlternativeforBankInvestments
Although a banking entity cannot invest at all in a covered fund
that it does not offer and organize, a banking entity could make a co-
investment, alongside a covered fund, directly into a portfolio
company
p y ((if that p
portfolio company
p y is an operating
p g company).
p y)

The co-investment could not be made pursuant to a co-

i
investment
t t fund,
f d as that
th t co-investment
i t t fund
f d would
ld b
be a ""covered
d
fund", which would violate the Volcker Rule.

There would be no violation, however, if the banking entity made

a direct investment into the operating company, and the banking
entity could enter into a separate advisory agreement with a fund
manager whereby
h b th the b
banking
ki entity
tit agrees tto pay ffees tto th
the ffund
d
manager for advising the banking entity on the co-investment.

29
 RestrictionsonTransactionswithAffiliated
CoveredFunds Super23A
A
Abankingentitythatadvises,manages,sponsors,
b ki tit th t d i
organizesorofferscoveredfunds(andallofthe
bankingentitysaffiliates)maynotenterintoa
g y ) y
transactionwiththecoveredfund(orwithanyother
coveredfundthatiscontrolledbythecoveredfund)
must comply with the restrictions in Section 23A of the
mustcomplywiththerestrictionsinSection23Aofthe
FederalReserveAct(FRA)asifthebankingentityor
affiliatewereamemberbankandthecoveredfund
wereanaffiliateofthememberbank.
AnysuchtransactionmustalsocomplywithSection
23B of the FRA which requires all transactions
23BoftheFRA,whichrequiresalltransactions
betweenamemberbankanditsaffiliatestobeonan
armslengthbasis.
30
 Section 23A
Section23A
PurposeofSection23AistoprotectFDICinsuredbanks
P f S ti 23A i t t t FDIC i db k
fromengaginginriskytransactions.
pp
Asappliedtocoveredfundsandaffiliatedmemberbanks,
Section23AprohibitsmemberbanksoftheFDICfrom:
transactingaloanorextendingalineofcredittothecoveredfund;
purchasing or investing in securities issued by the covered fund;
purchasingorinvestinginsecuritiesissuedbythecoveredfund;
purchasingassets,includingassetssubjecttoanagreementto
repurchase,fromthecoveredfund,exceptsuchpurchaseofreal
andpersonalpropertyasmaybespecificallyexemptedbytheFed
byorderorregulation;
acceptingsecuritiesissuedbythecoveredfundascollateralsecurity
foraloanorextensionofcredittoanypersonorcompany;or
issuingaguarantee,acceptance,orletterofcredit,includingan
endorsementorstandbyletterofcredit,onbehalfofthecovered
fund.

31
 Why Is This Restriction Super
WhyIsThisRestriction Super 23A?
23A?
Under
Underusual23A,amemberbankcanengagein
usual 23A a member bank can engage in
sometransactionswiththeaffiliate,forexample
transactionsthatinvolvelessthan10%ofthestock
andsurplusofthebank.
d l f th b k
o VolckerRulerestrictionsrelatingtoSection23A,
however, do not include any de minimis bucket.
however,donotincludeanydeminimisbucket.
Usual23AplacesappliestoFederalReservemember
banksandtheirsubsidiariesonly. Itdoesnotplace
prohibitions on other affiliates of the member bank
prohibitionsonotheraffiliatesofthememberbank.
o VolckerRule23Aprovision,however,greatlyexpands
,
therestrictionsontransactionstoallaffiliates,soit
treatsallaffiliatesofabankingentityasifthey
werethememberbank.

32
 Super23A:
ExceptionforPrimeBrokerageTransactions
A
Abankingentitymayenterintoaprimebrokeragetransaction
banking entity may enter into a prime brokerage transaction
withacoveredfundinwhichahedgefundorprivateequity
fundmanaged,sponsoredoradvisedbythebankingentity
invests if:
invests,if:
thecoveredbankingentityisin compliancewiththe
requirementsoftheVolckerRulewithrespecttoa coveredfund
g
organizedandofferedby y suchcoveredbankingentity(or
g y(
an affiliateorsubsidiarythereof);
ff l b h f)
thechiefexecutiveofficer(or equivalentofficer)ofthetop
tier affiliateofthecoveredbankingentity certifiesinwriting
annually (with a dutytoupdatethecertificationif
annually(witha duty to update the certification if
the informationinthecertification materiallychanges)thatthe
covered bankingentitydoesnot,directlyor indirectly,
gguarantee,assume,or otherwiseinsuretheobligations
g
or performanceofthecoveredfundorof
f f h df d f anycoveredfundin
df d
whichsuch coveredfundinvests;and
theFedhasnotdeterminedthat suchtransactionisinconsistent
with the safeandsoundoperationandcondition
withthe safe and sound operation and condition ofthecovered
of the covered
bankingentity.
33
 Super23A:
PrimeBrokerageTransactionException
U
UndertheProposedRules,aprimebrokerage
d h P dR l i b k
transactionmeansoneormoreproductsor
services providedbyacoveredbankingentityto
provided by a covered banking entity to a
a
coveredfund,suchascustody, clearance,securities
borrowing or lending services trade execution or
borrowingorlendingservices,tradeexecution,or
financing,data,operational,and portfolio
managementsupport.
g pp
PermittedPrimeBrokerageTransactionsmustalso
complywithSection23BoftheFRAasifthe
py
counterpartywereanaffiliate.

34
 IssuesConcerning
PrimeBrokerageTransactionException
D
Definitionofprimebrokeragetransactionisstillvague.
fi i i f i b k i i ill
E.g. wouldFXprimebrokerageorfuturesclearingbe
deemed prime
deemed primebrokeragetransactions?
brokerage transactions?
Theexceptionappliesonlytotransactionswithfundsin
g y
whichafundmanagedbyabankinvests.Doesnotseem
toallowfortransactingwithfundsthesameinsubstance
butthatareorganizedasmanagedaccounts,orfor
f d di
fundsdirectlymanagedbyabankaffiliate.
l d b b k ffili
Complianceconditionstousetheexception,asthey
require a certification of the CEO of the top tier affiliate
requireacertificationoftheCEOofthetoptieraffiliate
ofthecoveredbankingentity.

35
III.CoveredFundsProhibition:
I
IssuesforNonU.S.Banks
f N US B k

36
 Conflicts With Foreign Law
ConflictsWithForeignLaw
In
Inordertofitwithintheexceptionstotherestrictionsonsponsoringa
order to fit within the exceptions to the restrictions on sponsoring a
coveredfund,thecoveredfundmustnot:
sharethesamenameor avariationofthesamenamewith
the bankingentity(orwithanaffiliateor
banking entity (or with an affiliate or subsidiarythereof);or
subsidiary thereof); or
usethewordbankin itsname.
Manyforeignlaws(includingforexample,UCITregulations),however,
require banks that sponsor a fund to use the bankssnameinthenameof
requirebanksthatsponsorafundtousethebank name in the name of
fund.
Thisprohibitiononsharingthesamenameappliestobankingentitiesand
theiraffiliates,whichwouldincludetheassetmanagementarmsofbanks.
, g
Manyforeignbankshaveassetmanagementarmsthatdonotusethe
banksname(e.g.,SocGenownsLyxor).
Butsincetheassetmanagementarmisanaffiliate,itappearsthatafund
g , pp
couldnotsharethesamenameasthebankor theaffiliate(e.g.,Lxyor
couldnotuseLyxorinthenameofafund).

37
 ExceptionforActivities
SolelyOutsidetheUnitedStates
A
ActandtheProposedRulesallowfortheacquisitionor
t d th P dR l ll f th i iti
retentionofany ownershipinterestin,orthe sponsorshipof,
acoveredfundbya bankingentityif:
thebankingentityisnot directlyorindirectlycontrolledby
a bankingentitythatisorganizedunder thelawsofthe
UnitedStatesorofone ormoreStates;;
theactivityisconductedpursuant toSection4(c)(9)or
4(c)(13)oftheBankHoldingCompanyAct;
noownershipinterestinsuch
no ownership interest in such coveredfundisofferedfor
covered fund is offered for
saleorsold toaresidentoftheUnitedStates;and
theactivityoccurssolelyoutside oftheUnitedStates.

38
 ExceptionforActivities
SolelyOutsidetheUnitedStates
P
ProposedRulesprovidethatabankingentityispresumedtobein
dR l id th t b ki tit i dt b i
compliancewithSection4(c)(9)or4(c)(13)oftheBHCActif:
ifitisaqualifyingforeignbankingorganizationandincompliancewith
subpartBofRegulationKoftheFederalReserveBoard;or
ifnotaforeignbankingorganization,theentitymeetsatleasttwoof
thefollowingrequirements:
g q
totalassetsofthecoveredbankingentityheldoutsideoftheUnited
StatesexceedtotalassetsofthecoveredbankingentityheldintheUnited
States;
totalrevenuesderivedfromthebusinessofthecoveredbankingentity
outsideoftheUnitedStatesexceedtotalrevenuesderivedfromthe
businessofthecoveredbankingentityintheUnitedStates;or
totalnetincomederivedfromthebusinessofthecoveredbankingentity
outsideoftheUnitedStatesexceedstotalnetincomederivedfromthe
businessofthecoveredbankingentityintheUnitedStates.

39
 ExceptionforActivities
SolelyOutsidetheUnitedStates
P
ProposedRuleswoulddefineanactivitytohave
dR l ld d fi ti it t h
occurredsolelyoutsideofthe UnitedStatesonlyif:
the
thebankingentity
banking entity engagingintheactivityisnot
engaging in the activity is not
organized underthelawsoftheUnitedStatesor ofoneor
moreStates;
nosubsidiary,affiliate,or
b idi ffili t employeeofthecovered
l f th d
bankingentity thatisinvolvedintheofferorsaleof
an ownershipinterestinthecoveredfund isincorporated
orphysicallylocatedin
h i ll l t d i theUnitedStatesorinoneor
th U it d St t i
more States;and
noownershipinterestinsuch
p coveredfundisofferedfor
saleorsold toaresidentoftheUnitedStates.

40
 IssuesWith
SolelyOutsidetheUnitedStatesException
SolelyOutsidetheU.S.isverynarrow
S l l O id h U S i
Fromapolicyperspective,anonU.S.bankshouldbeableto
acquireapassiveownershipinterestinanonU.S.fund.Butthe
q p p
ProposedRulesrequirethatthecoveredfundnotbeofferedfor
saleintheU.S.Inapassiveinvestment,however,thebankdoes
notcontrolwherethefundisoffered,soanonU.S.bankcouldbe
,
precludedfrommakinginvestmentsunlessitcontrolsthefund.
SomenonU.S.banksmaywanttoU.S.basedpersonneltosellto
nonU S investors But U S personnel of bank affiliates are not
nonU.S.investors.ButU.S.personnelofbankaffiliatesarenot
allowedtoparticipateinfundofferingseventononU.S.residents.

41
 Other Issues for Non U S Banks
OtherIssuesforNonU.S.Banks

Definitionofcoveredfundpullsineveryinvestment
vehicle evenpubliclytradedandregulatedforeignfunds.
p y g g
Notclearhowtocalculateinvestmentsinfundsfor
purposesofcomplyingwithrestrictionslimitingto
percentage of Tier 1 capital U S restrictions may impinge
percentageofTier1capital.U.S.restrictionsmayimpinge
onforeignregulationofnonU.S.banks.
VolckerRuleSuper23Arequirementsdonothaveasimilar
p q
solelyoutsidetheU.S.provisionexceptiontoits
prohibitions.

42
IV.ProprietaryTrading
IV Proprietary Trading
Prohibition

43
 SummaryofProprietaryTrading
Prohibition
Bankingentitiesmaynotengagein
Banking entities may not engage in proprietary
proprietarytrading
trading::
toengageasaprincipal inanytransactiontopurchaseorsell,orotherwise
acquireordisposeof,anysecurity,derivative,futureoroptiononanysuch
security,derivativeorfuture
i d i i f
principallyforthepurposeofshorttermresale,benefittingfromshort
termpricemovements,realizingshorttermarbitrageprofits,orhedging
p , g g p , g g
oneofthosepositions.

Agency
Agencytransactionsareoutsidethescopeoftherule.
transactions are outside the scope of the rule
UndertheProposedRules,thereisarebuttablepresumption thatany
security,derivativeorfuturethatisheldfor60daysorlessinvolves
proprietarytradingunlessanexemptionapplies.

44
 Definition: Proprietary Trading (cont )
Definition:ProprietaryTrading(cont.)
Every positiontakenbyaregisteredbrokerdealer,municipalsecurities
k b db k d l l
dealer,governmentsecuritiesdealer,swapdealerorsecuritiesbased
swapdealer,inconnectionwithitsdealingactivities,isproprietary
trading,unlessanexemptionapplies(i.e.,presumptionisthatdealingis
proprietarytrading).
Swaps,security
Swaps securitybased
basedswaps,FXforwards,FXswapsandcommodity
swaps FX forwards FX swaps and commodity
forwards areclassifiedasderivativesandthussubjecttotheprohibition.
Evenifthefollowingarefortheshortterm,loans,spotcommoditiesand
spotFX
FX arenot coveredfinancialpositions,andarethusexcludedfrom
d fi i l ii d h l d df
theprohibition.
o Note:TheProposedRulesdonotincludecriteriafordeterminingwhatisa
p g
loan,orwhetherequitylikecontrolfeaturesinaninstrumenttermeda
loanaffectthedetermination.

45
 Proprietary Trading: Exclusions
ProprietaryTrading:Exclusions
R
ReposandReverseRepos:Accountsusedsolelyforpositions
dR R A t d l l f iti
arisingunderrepos/reversereposbecausetheyaretheeconomic
equivalentofasecuredloan
SecuritiesLending:Accountsusedsolelyforpositionsheldundera
S iti L di A t d l l f iti h ld d
securitieslendingarrangementbecausesuchanarrangement
operatesasameanstofacilitatesettlementofsecurities
transactions and is not based on expected or anticipated
transactionsandisnotbasedonexpectedoranticipated
movementsinassetprices.
LiquidityManagement:Accountsusedsolelyforbonafideliquidity
management to meet short term liquidity needs in accordance with
managementtomeetshorttermliquidityneedsinaccordancewith
adocumentedliquidityplanmeetingcertaincriteria.
o Necessarybecausebanksneedtomanagetheirliquidity,butthe
exclusion is narrow and must be pursuant to a documented plan
exclusionisnarrowandmustbepursuanttoadocumentedplan.

46
 ProprietaryTrading:
PermittedActivities
MarketMaking
Trading in U.S. Government Obligations
TradinginU.S.GovernmentObligations
RiskMitigatingHedging
Underwriting
Trading on Behalf of Customers
TradingonBehalfofCustomers
TradingSolelyOutsidetheU.S.
CertainTradingbyInsuranceCompanies

47
 Permitted Activities (cont )
PermittedActivities(cont.)
Additionalrequirementsthatapplytopermittedactivities:
Mustbeconductedinaccordancewithcertainrequirementsthat
Must be conducted in accordance with certain requirements that
applytoeachpermittedactivity;
Bankingentitymusthaveimplementedtherequiredcompliance
program(ideabeingthatifnoprogramisinplace,bankingentitymay
(id b i th t if i i l b ki tit
engageinaprohibitedactivityintheguiseofapermittedactivity);
Forcertainexempttradingactivities,thetradingunitconductingthe
activitymustreportquantitativemeasurementstotheU.S.regulators;
and
Thebankingentitymustensurethattheactivitywouldnot:
The banking entity must ensure that the activity would not:
Involveorresultinamaterialconflictofinterestbetweenthe
entityanditsclients,customersorcounterparties;
Result,directlyorindirectly,inamaterialexposurebythebanking
entitytoahighriskassetorhighrisktradingstrategy;or
Poseathreattothesafetyandsoundnessoftheentityorthe
Pose a threat to the safety and soundness of the entity or the
financialstabilityoftheUnitedStates.
48
 PermittedActivity:
MarketMaking
Toqualifyforthemarketmakingpermittedactivity,thefollowing
lf f h k k d h f ll
requirementsmustbemet:
BonaFideMarketMaking.Theparticularunitmustholditselfoutas
g p
willingtobuyandsellpositionsintheparticularcoveredfinancial
positionforitsownaccountonaregularorcontinuousbasis.
NearTermDemand.Activitiesmustbedesignednottoexceed
Near Term Demand Activities must be designed not to exceed
reasonablyexpectedneartermdemandsofclients,customersor
counterparties.
Revenue.Theactivitiesofthetradingunitmustbedesignedto
generaterevenuesprimarilyfromsourcesincludingfees,commissions
andbid/askspreads,orotherincomenotattributabletochangesin
/ p , g
value,orhedging,ofcoveredfinancialpositionsheldinthetrading
account.

49
 PermittedActivity:
MarketMaking(cont.)
Registration.ThebankingentitymustberegisteredintheU.S.,or
h b k b d h
excludedorexemptfromU.S.registration,asasecuritiesdealer,
municipalsecuritiesdealer,governmentsecuritiesdealer,swapdealer
orsecuritybasedswapdealer,or,ifengagedinbusinessasadealer
outsidetheUnitedStates,subjecttosubstantiveregulationwhereits
businessislocated.
InternalCompliance.Theactivitymustbeconductedpursuantto
reasonablydesignedwrittenpoliciesandprocedureandcontrols
and be subject to independent testing
andbesubjecttoindependenttesting.
Compensation.Compensationofpersonsperformingmarketmaking
activitiesmustbedesignednottorewardproprietarytrading.

50
 PermittedActivity:
TradinginU.S.GovernmentObligations
U
U.S.governmentobligationsincludesU.S.andmunicipalgeneral,
S t bli ti i l d U S d i i l l
limitedandpassthroughobligationsandforwardtrading.
Itdoesnot includeobligationsofforeigngovernmentsormultilateral
organizations,derivativesongovernmentobligationsorobligations
guaranteedbyagovernmentissuer.Therefore,anytradinginthose
instrumentsmustqualifyasmarketmakingoranotherpermitted
activitytobepermissible.
Foreigngovernmentshaveobjectedthatfailingtopermittradingin
foreign government obligations will damage trading.
foreigngovernmentobligationswilldamagetrading.
Toqualifyfortheexemption,thefollowingrequirementsmustbemet:
ComplianceandMetrics.Tradingunitsthatengageinmarketmaking
relatedactivitiesortradeinU.S.governmentobligationsmustmeet
l d i ii d i US bli i
strictcompliancerequirementsandreportasetofmetricstotheU.S.
regulators.

51
 PermittedActivity:
RiskMitigatingHedging
ik ii i d i
Toqualifyfortheexemption,thefollowingrequirementsmustbemet:
q y p , g q
SpecificRisks.Thehedgingtransactionmustbemadeinconnectionwith
existingindividualoraggregatedpositionsinotherholdingsandmustbe
designed to reduce specific risks. Portfolio hedging is contemplated.
designedtoreducespecificrisks.Portfoliohedgingiscontemplated.
Anticipatoryhedging(i.e.,puttingahedgeonaheadoftakingaposition)is
permittedifconsistentwithriskmanagementpracticesandistakenslightly
( g y )
beforetheriskmaterializes.(Notclearwhatslightlymeans.)
Correlation.Hedgesmustbereasonablycorrelatedtotheriskthatthe
purchaseorsaleisintendedtohedge.
NoNewSignificantExposures.Atinception,thehedgemustnotgiveriseto
No New Significant Exposures At inception the hedge must not give rise to
newsignificantunhedgedexposures.
ContinuingReview.Ongoingreview,monitoringandmanagementofthe
hedge consistent with written hedging policies must ensure a reasonable level
hedgeconsistentwithwrittenhedgingpoliciesmustensureareasonablelevel
ofcorrelationismaintainedandthatanysignificantexposureafterinception
ofthehedgeismitigated.(Needtolookatthecorrelationbetweentherisk
and the hedge throughout the life of the transaction )
andthehedgethroughoutthelifeofthetransaction.)

52
 PermittedActivity:
RiskMitigatingHedging
DisagreementastowhetherJPMorgansLondon
Whaletradeswouldhavefitwithinthehedging
exemptionhadtheVolckerRulebeenineffect.
Inparticular,disagreementwhether:
thetradeswerereasonablycorrelatedtotherisk
thehedgegaverisetonewsignificantunhedged
the hedge gave rise to new significant unhedged
exposures
thetradesweredesignedtoreducespecificrisks
the trades were designed to reduce specific risks

53
 PermittedActivity:
RiskMitigatingHedging(cont.)
InternalComplianceProgram.Thecomplianceregimemustinclude
l l h l l d
writtenhedgingpoliciesatthetradingunitlevelandarticulated
mandatesforeachtradertoensurethatthedecisionofhowtoputon
ahedgeisconsistentwithsuchpoliciesandmandates.
CompensationIncentives.Compensationarrangementsmustbe
designed not to reward proprietary risktaking
designednottorewardproprietaryrisk taking.
HedgingbyDifferentEntities.Ifseparatelegalentitiesorlevelsofan
organizationestablishpositionsandthecorrespondinghedges,the
entitymustdocumenttheriskmitigatingpurposeofthehedge,the
i d h ik ii i f h h d h
risksthatthetransactionisdesignedtoreduce,andthelevelof
organizationestablishingthehedge.

54
 Permitted Activity: Underwriting
PermittedActivity:Underwriting
TToqualifyfortheexemption,thefollowingrequirementsmustbe
lif f th ti th f ll i i t tb
met:
InternalCompliance.Thebankingentitymusthavetherequisite
internal compliance program including written policies and
internalcomplianceprogram,includingwrittenpoliciesand
procedures,internalcontrolsandindependenttestingrequiredto
ensuretheunderwritingcriteriaaremet.
Distribution.Thetransactionsmustbeeffectedsolelyinconnection
Distribution The transactions must be effected solely in connection
withadistributionofsecuritiesforwhichthebankingentityisacting
asanunderwriter.ThesetermsgenerallytracktheRegMdefinitions
ofdistribution,securitiesandunderwriter,althoughthedefinitionof
underwriterincludesapersonwhohasanagreementwithanother
d i i l d h h ih h
underwritertoengageinadistributionofsecuritiesfororonbehalfof
anissuerorsellingsecurityholder.
CustomerDemand.Theunderwritingactivitiesofthebankingentity
Customer Demand The underwriting activities of the banking entity
mustbedesignednottoexceedthereasonablyexpectednearterm
demandsofclients,customersandcounterparties.

55
 PermittedActivity:
Underwriting(cont.)
Revenue.Aswiththemarketmakingpermittedactivity,the
h h k k d h
underwritingactivitiesoftheentitymustbedesignedtogenerate
revenuesprimarilyfromfees,commissions,underwritingspreadsor
otherincome,andnotfromappreciationinthevalueofcovered
financialpositionsitholdsrelatedtosuchactivitiesorthehedgingof
suchcoveredfinancialposition.
p
CompensationIncentives.Compensationarrangementsfor
underwritingpersonnelmustbedesignednottorewardproprietary
risk taking
risktaking.

56
 PermittedActivity:
TradingonBehalfofCustomers
Tradingonbehalfofcustomersisnarrowlydefined:
T di b h lf f t i l d fi d
Purchaseorsalemustbeconductedbythebankingentity
g , y g
actingasinvestmentadviser,commoditytradingadviser, ,
trusteeorinasimilarfiduciarycapacity;conductedforthe
accountofthecustomer;andinvolvesolelyfinancial
positions of which the customer is the beneficial owner; or
positionsofwhichthecustomeristhebeneficialowner;or
Thebankingentityisactingasarisklessprincipal(i.e.,the
bankingentityentersintoapurchaseorsaleofaposition
for its own account to offset a contemporaneous sale to or
foritsownaccounttooffsetacontemporaneoussaletoor
apurchasefromacustomer);or
Thecoveredbankingentityisaninsurancecompanythat
purchasesorsellsacoveredfinancialpositionfora
h ll df l f
separateaccount.

57
 PermittedActivity:
TradingSolelyOutsidetheU.S.
TToqualifyfortheexemption,thefollowingrequirementsmustbe
lif f th ti th f ll i i t tb
met:
AU.S.bankingentitymaynot,directlyorindirectly,beinvolvedinthe
trading (thus the exemption is unavailable to U S banking entities
trading(thus,theexemptionisunavailabletoU.S.bankingentities
eveniftheyareindirectlyinvolved)
NopartytothetrademaybeaU.S.resident.
The
Theterm
term U
U.S.resident
S residentisunique(andbroaderthanReg.Sdefinition)
is unique (and broader than Reg S definition)
itincludesnaturalpersonswhoresideintheU.S.,companiesorganizedin
theU.S.,U.S.branchesofforeignentities,nonU.S.branchesofU.S.banks,and
discretionaryaccountsheldforthebenefitofnonU.S.residentsbyaU.S.
dealer or fiduciary
dealerorfiduciary
Forexample,aFrenchbankingentitywouldnotbepermittedtoengagein
tradingwiththeLondonofficeofaU.S.bank.
Noneofthebankingentityspersonnelthataredirectlyinvolvedinthe
g y p y
trademaybephysicallylocatedintheU.S.(althoughpersonnel
performingpurelyadministrative,clericalorministerialfunctionsmay
beintheU.S.)
ProposedRules:ThetrademustbeexecutedwhollyoutsideoftheU.S.
d l h d b d h ll d f h
(riskmanagementandbookingoutsidetheU.S.isinsufficient)
58
 Metrics
Themarketmaking,hedging,underwritingandtradinginU.S.government
obligationspermittedactivitiesrequirethatthebankingentityavailing
g p q g y g
itselfoftheexemptionmustcalculatecertainmetricsonadailybasisand
reportthemtotheU.S.regulatorseachmonth,andmustalsokeep
recordsregardingsuchmetrics.
Themetricsmustbereportedatthetradingdesklevel,atonelevelofthe
Th i b d h di d k l l l l f h
organizationupfromthetradingdesk,andacrossalltradingoperations.
TheU.S.regulatorswillanalyzethereportedinformationtomonitor
banking entitiescompliancewiththeprohibitiononproprietarytrading.
bankingentities compliance with the prohibition on proprietary trading
Therequiredmetricsfallintofivecategories:
Riskmanagementmeasurements(includingVaR,SVaRandVaRexceedance)
Sourceofrevenuemeasurements(includingseveralP&Lmetrics)
Source of revenue measurements (including several P&L metrics)
Revenuerelativetoriskmeasurement(includingP&Lvolatilityandrelated
statisticalanalyses)
Customer
Customerfacing
facingactivitymeasurements(includinginventoryagingandrisk
activity measurements (including inventory aging and risk
turnover,andaratioofcustomertononcustomertrades)
Paymentoffees,commissionsandspreadsmeasurement(spreads/fees
earnedvs.paid)

59
V.ComplianceProgram
R
Requirements
i

60
 RequiredComplianceProgram:
ProprietaryTrading
Bankingentitiesthatengageinproprietarytradingmustimplementa
k h d l
comprehensivecomplianceprogram.Amongotherthings,itmustinclude:
BoardofdirectorsandCEOresponsibilitytoreviewandapproveofthe
p y pp
program,maintainacultureofcomplianceandidentifyresponsible
businesslinemanagers
Independenttestingoftheprogram
Independent testing of the programsseffectiveness
effectiveness
Asystemofinternalcontrolsreasonablydesignedtomonitorand
identifypotentialareasofnoncomplianceandpreventtheentityfrom
engaginginprohibitedactivities
Authorizedrisks,instrumentsandproducts:risklimits,includingyet
tobedefined
to be definednumericalthresholdsforeachtradingunitwhichwill
numerical thresholds for each trading unit which will
triggerheightenedreviewofquantitativemeasurements;internal
escalationandregulatornotificationuponareasonablelikelihoodof
violation; and firm specific metrics (as necessary)
violation;andfirmspecificmetrics(asnecessary)
61
 RequiredComplianceProgram:
ProprietaryTrading
Complianceprogramrequirements(continued):
l ( d)
Makingandkeepingrecordssufficienttodemonstratecompliance
withtheProprietaryTradingrules
p y g
Internalpoliciesandproceduresthatspecifyhowtradingaccountsare
identifiedanddescribeeachtradingunitsobjectivesandstrategies
Trainingfortradingpersonnel,managersandotherappropriate
i i f di l d h i
personnel

62
 RequiredComplianceProgram:
ProprietaryTrading(Cont.)
Thecompliancerulesevenapplytobankingentitiesthatdonotengagein
h l l l b k h d
proprietarytrading:
Mustenactcompliancepoliciesthatincludemeasuresdesignedto
p p g
preventtheentitiesfrombecomingengagedinsuchactivitiesandthat
requiretheentitytodevelopandprovideforthecomplianceprogram
required by the Volcker Rule prior to engaging in such activities (or in
requiredbytheVolckerRulepriortoengaginginsuchactivities(or,in
thecaseofcoveredfundsactivities,makingsuchinvestments).
ProposedRulesstatethatcomplianceprogramsshouldnotfollowa
genericonesizefitsallapproach,butinsteadshouldbecarefullytailored
i i fi ll h b i d h ld b f ll il d
totakeintoaccountandreflecttheuniquemannerinwhichthebanking
entityoperates,aswellastheparticularcompliancerisksitsbusinesses
present.

63
 Required Compliance Program:
Covered Funds
ProposedRulesalsorequirethatbankingentitiesdevelopacomplianceprogram
reasonably designed to ensure and monitor compliance with the prohibitions and
reasonablydesignedtoensureandmonitorcompliancewiththeprohibitionsand
restrictionsoncoveredfundactivities.
AllofthesamerequirementsasapplytotheProprietaryTradingcomplianceprogram,
except as applicable to tracking the covered fund rules and activities
exceptasapplicabletotrackingthecoveredfundrulesandactivities.
Inaddition,enhancedreportingandrecordkeepingrequirementsapplyif:
o thebankingentityhas,togetherwithaffiliates,aggregateinvestmentsincovered
funds of $1 billion; or
fundsof$1billion;or
o sponsorsoradvises,togetherwithitsaffiliates,coveredfundswhichhavetotalassets
of$1billion
(in each case as measured over the prior four quarters)
(ineachcaseasmeasuredoverthepriorfourquarters)
Compliancepoliciesandprocedurestotrackthecoveredfundsactivitiesshouldbe
somewhateasiertodraftandmonitorthantheproprietarytradingactivities,but
certain monitoring could be difficult (such as tracking whether risk mitigating hedging
certainmonitoringcouldbedifficult(suchastrackingwhetherriskmitigatinghedging
activitiesarewithintherequirements).

64
Contact Information
ContactInformation

AdamD.Gale
Chadbourne&ParkeLLP
30RockefellerPlaza
NewYork,NY10112
(
(212)4085196
)
agale@chadbourne.com

65