Federal Agencies Approve Interim Final Rule Authorizing Retention of Interests in and Sponsorship of TruPS-Backed CDOs

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The Board of Governors of the Federal Reserve System (“FRB”), the CFTC, the FDIC, the Office of the Comptroller of the Currency and the SEC (the “Agencies”) approved an interim final rule to permit certain smaller banking entities to retain interests in certain collateralized debt obligations (“CDOs”) backed primarily by trust preferred securities (“TruPS”) from the investment prohibitions of Dodd-Frank Section 619 (the “Volcker Rule”). 

Under the interim final rule, the agencies permit the retention of an interest in or sponsorship of covered funds by banking entities if the following qualifications are met: 

  • the TruPS CDO was established, and the interest was issued, before May 19, 2010;
  • the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral; and
  • the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the agencies issued the final Volcker Rule.

Under the interim final rule, a “Qualifying TruPS Collateral” is defined as any trust preferred security or subordinated debt instrument issued prior to May 19, 2010, by a depository institution holding company that, as of the end of any reporting period within 12 months immediately, preceding the issuance of such trust preferred security or subordinated debt instrument, had total consolidated assets of less than $15 billion; or issued prior to May 19, 2010, by a mutual holding company.

The Agencies believe that the approach adopted in the interim final rule reconciles the policies of the Volcker Rule with its companion provision in Dodd-Frank, Section 171 (“Leverage and Risk-Based Capital Requirements”).  The Agencies will accept comment on the interim final rule for 30 days following its publication in the Federal Register. 

See:  Text of Interim Final Rule.
Related news:  Volcker Lawsuit on TruPS-Backed CDO (December 30, 2013); Agencies Are Reviewing Treatment of Specified Collateralized Debt Obligations under Volcker Rule (December 27, 2013).