Five federal regulatory agencies today finalized a rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds—known as covered funds.
The final rule is broadly similar to the proposed rule from January. Wall Street responded well to the news, with shares of big banks such as Goldman Sachs and JP Morgan Chase all trading at 2% higher.
The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.
The Volcker Rule was part of the overhaul of banking regulation approved in the Dodd-Frank Act passed by Congress in 2010 in an effort to curtail excesses that had led to the 2008 financial crisis, the country's worst banking crisis since the 1930s.
However, President Donald Trump had campaigned in 2016 on rolling back what he saw as over-regulation of the banks that had weighed on the economy by preventing the banks from making loans to qualified borrowers.
Like the proposal, the final rule modifies three areas of the rule by:
- Streamlining the covered funds portion of rule;
- Addressing the extraterritorial treatment of certain foreign funds; and
- Permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker rule was intended to address.
The rule will be effective on October 1.