Pub. 5 2014 Issue 1

spring 2014 19 West Virginia Banker instruments such as options and futures. Banks limiting trading to U.S. government, agency, or municipal bonds will be exempt- ed from the prohibitions on proprietary trading. Banks may also engage in trading activities as agent, broker, or custodian, through a deferred compensation plan, trustee or fiduciary on behalf of customers, repurchase and securities lending agreements, and risk-mitigating hedging activities. Covered Funds Although most community banks do not have any involvement with private equity or hedge funds, they would be exempt from prohibitions as described above, thus permitting investments in wholly owned subsidiaries, joint ventures, asset securitizations, insurance company separate accounts for bank owned life insur- ance, or any entity formed by the FDIC to facilitate a workout of a troubled institution. Trust Preferred Securities Trust Preferred Securities (TruPS) are a quasi-equity, quasi-debt instrument issued by banks or their holding companies, debt-like because they bear interest and equity-like because they can be structured to quality for Tier 1 capital. TruPS issued by banks were bundled into Collateralized Debt Obligations (CDOs) sold to community banks and other investors. The final rules as issued in 2013 provided no exemptions related to investments in TruPS. Under those original rules, banks owning TruPS CDOs would be forced to sell to comply with the new rules, and, in most cases, incur loss upon sale. The banking industry estimated there were 275 banks affected with $600 million in unrecognized losses. Following an industry outcry and legal action by the American Bankers Association, the regulators relented. In January 2014, they issued an Interim Final Rule grandfathering certain TruPS CDOs from the new treatment, including those with “qualifying collateral “issued prior to May 19, 2010 and purchased on or before December 10, 2013. Conclusion Whether the Volcker Rule will achieve its objectives still remains a point of contention between the regulatory and banking com- munities. Regardless, large banks, especially those over $50 billion in assets will see curtailment of authorities and a significant cost of compliance. Since community banks engage in few of the prohibited transactions, it appears that there will be impact in terms of properly documenting Section 619 provisions in policies and procedures. When examination procedures covering 619 are released, they will undoubtedly provide additional guidance and insight for the banking community. n Chap Donovan is a Senior Manager at Arnett Foster Tooth- man PLLC, Certified Public Accountants, Charleston, West Virginia. A Certified Public Accountant, Certified Regulatory Compliance Manager, and Certified Treasury Professional, Mr. Donovan has over thirty five years’ experience in the financial institutions industry. He provides audit, internal audit, loan review, and compliance consulting services to community banks through the firm’s Financial Institutions Service Group Mr. Donovan can be contacted at 800-642-3601 or chap.donovan@aftcpas.com .