By John Filar Atwood
The SEC staff has advised entities relying on the Volcker Rule that the required annual CEO certification should be submitted no later than March 31, 2016. The staff provided this and other guidance in an update to its responses to frequently asked questions regarding the Commission’s rule under Section 13 of the Bank Holding Company Act (the Volcker Rule).
The staff has been periodically adding to the Volcker Rule FAQ document since June 10, 2014, and the latest update addresses the question of when a banking entity is required to submit the annual CEO certification for prime brokerage transactions. The SEC’s rule provides that a banking entity may enter into any prime brokerage transaction with any covered fund in which a covered fund managed, sponsored, or advised by the banking entity has taken an ownership interest, so long as certain conditions are met, including the submission of a written CEO certification each year.
CEO certification. The staff believes that banking entities that are required to provide the annual CEO certification for prime brokerage transactions as of the end of the conformance period should submit the first CEO certification after the end of the conformance period but no later than March 31, 2016. A banking entity may provide the required annual certification in writing at any time prior to the March 31 deadline, according to the guidance.
The conformance period for investments in, and relationships with, a legacy covered fund currently ends on July 21, 2016. The staff advised that banking entities that engage in prime brokerage transactions with legacy covered funds should submit their first CEO certification by March 31 following the end of the relevant conformance period, but in any case annually within one year of its prior certification. The staff noted that the CEO has a duty to update the certification if the information in the certification materially changes at any time during the year when he or she becomes aware of the material change.
Objective factors. The staff also provided guidance on a second question regarding whether a banking entity’s compliance program for market making-related activities may include objective factors on which a trading desk may rely to determine whether a security is issued by a covered fund. The staff said that for purposes of meeting the final rule’s exemption for market-making, a reasonably designed compliance program for a trading desk engaged in market making-related activity may include objective factors on which the trading desk may rely to determine whether a security is issued by a covered fund.
The staff clarified that objective factors would not be considered part of a reasonably designed compliance program if the banking entity designed or used such objective factors to evade the Volcker Rule and the SEC’s final rule. However, the staff does not believe that it would be reasonable for a trading desk to rely solely on either or both the name of the issuer or the title of the issuer’s securities. These factors alone would not convey sufficient information about the issuer for a trading desk reasonably to determine whether a security is issued by a covered fund, the staff said.
Use of third party. The staff also addressed a related question regarding whether a market maker may meet its compliance program requirements by making use of a shared utility or third party service provider that uses objective factors if the market maker reasonably believes the system of the shared utility or third party service provider will identify whether a security is issued by a covered fund. The staff said that a reasonably designed compliance program for a trading desk engaged in market making-related activity may permit the trading desk to use a shared utility or third party service provider in those circumstances.
The staff noted that whether a compliance program is reasonably designed will depend on the facts and circumstances. A compliance program that is reasonably designed for a trading desk engaged in market making-related activities may not be reasonably designed for other activities conducted by a banking entity. The FAQ guidance only addresses the compliance program for a trading desk engaged in market making-related activity.
The staff advised that a banking entity’s reliance on objective factors, a shared utility or a third party service provider must be subject to independent testing and audit requirements applicable to the banking entity’s compliance program. If independent testing of the compliance program shows that the objective factors used by the banking entity, shared utility or third party service provider are not effective in identifying whether a security is issued by a covered fund, then the banking entity must promptly update its compliance program to remedy those issues, the staff stated. In addition, if at any time the banking entity discovers it holds an ownership interest in a covered fund in violation of the final rule implementing the Volcker Rule, it must promptly dispose of the interest or otherwise conform it to the requirements of the final rule, according to the staff.