Final Volcker Rule – Agencies Release Special FAQ Regarding CDOs Backed by Trust Preferred Securities

The banking agencies today released an FAQ regarding the treatment of investments in TruPS CDOs under the final Volcker Rule. The FAQ confirms that banks should analyze their investments in TruPS CDOs as they would other investments for purposes of the Volcker Rule’s fund prohibition, namely by determining whether the CDO is a “covered fund” and whether the bank’s investment is an “ownership interest”.

The FAQ does not grant special relief for investments in TruPS CDOs, and impliedly confirms that such investments that cannot qualify for any exemption must be divested by the end of the conformance period (July 2015). The FAQ also does not address any of the potential accounting implications for such investments in TruPS CDOs. Instead, the FAQ points out that banks may consider other options, besides divestment, to conform to the rule. Such options include (i) changing the rights that come with their investment so that it will no longer be considered an “ownership interest,” or (ii) amending the CDO documents so that the CDO will no longer be deemed a “covered fund” (for example, by achieving compliance with the conditions for an exemption from the Investment Company Act other than 3(c)(1)/3(c)(7)). The FAQ also implies that banks may not be able to decide today if they will ultimately be required to sell their interests, and therefore may not necessarily need to change the accounting treatment used for such investments at this time.