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Regulators Announce Trust-Preferred Fix

Posted on 1/15/2014

The federal banking and securities regulators last night announced an addition to the final Volcker Rule regulations that is intended to exempt most bank investments in collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS). Under the rule, banks will be able to retain their ownership interests in their TruPS CDOs provided the funds meet certain qualifications. To facilitate compliance, the regulators released a list of funds meeting those qualifications that banks can reference.

Funds not on the list might still qualify for an exemption if they meet the criteria outlined in the rule. The bank that holds the fund must believe its composition is "primarily in qualifying TruPS collateral," which is defined as TruPS issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets or by a mutual holding company. Additionally, an exempt TruPS CDO must have been created prior to May 19, 2010, and a bank must have acquired its interest in the CDO by December 10, 2013.

"Our initial review of today's action by the regulators suggests that the Interim Final Rule provides a broad exemption for banks holding trust preferred securities from the original Volcker Rule," said ABA President and CEO Frank Keating. "ABA will be conducting a more comprehensive review of the amended language and will announce a decision regarding the pending litigation on this issue [Wednesday].

"ABA commends the regulators' speed and judiciousness in revisiting the impact of the Volcker Rule. Their action today should allow banks to avoid taking millions of dollars in unexpected and unnecessary write downs. We look forward to continuing to work with the regulators to ensure that the implementation of the 1,000-plus-page Volcker Rule is well reasoned and workable."

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