The Agencies responsible for implementing the Volcker Rule released two new FAQs. One confirms that a banking entity may reasonably rely on objective factors or a shared utility or third party service provider as part of its covered funds compliance program in the context of market making activities. The other addresses the timeframe for providing the CEO certification required when relying on the prime brokerage exemption.
FAQ 17 helpfully confirms that trading desks engaged in market making activities may rely on the determination of a service provider that utilizes objective factors to identify whether a security is issued by a covered fund, provided that the banking entity “reasonably believes” the system used by the service provider will identify covered funds. “Objective factors” in this regard are defined in FAQ 17 as factors “that can be used to reliably identify whether an issuer or a particular type of issuer is a covered fund.” The FAQ apparently responds to the industry proposals (through SIFMA) to the Agencies over the last year for the development and use of a service that would look to certain readily verifiable characteristics—such as whether a security is registered—to indicate non-covered fund status, rather than requiring a direct analysis of applicable exemptions or exclusions. FAQ 17 also confirms that a trading desk’s compliance program may include objective factors that traders engaged in market making may rely on to determine whether a security is issued by a covered fund. However, a trading desk may not rely on objective factors, shared utilities or third party service providers for a fund that the banking entity itself sponsors or organizes and offers, or has previously determined is a covered fund in connection with acquiring an ownership interest in the issuer as an investment.
The banking entity’s use of objective factors, a shared utility or a third party service provider must be subject to the Volcker Rule’s independent testing and audit requirements and, if the banking entity later determines it impermissibly holds an ownership interest in a covered fund, it must promptly dispose of or conform the interest.
FAQ 18 clarifies that the annual CEO certification required in connection with the prime brokerage exemption under Section __.14(a)(2) of the final rule should be provided no later than March 31, 2016. For legacy covered funds (i.e., those funds a banking entity sponsored or owned prior to December 31, 2013), the certification should be provided by March 31 following the end of the relevant conformance period. Subsequent certifications should be provided annually within one year of the prior certification and, as provided in the final rule, the CEO must update the certification if the information it contains materially changes at any point during the year.