Banks OK'd to keep interests in some trust preferred-backed CDOs

By Jennifer Chiou

New York, Jan. 15 - Five federal agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Securities and Exchange Commission, announced that they have approved an interim final rule to authorize banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities.

At the end of December, the agencies said that they would review whether it would be appropriate and consistent with the Dodd-Frank Act to forgo subjecting CDOs backed by trust preferred securities to the investment prohibitions under the Volcker Rule, which is under section 619 of Dodd-Frank.

Under the interim final rule, the agencies said in a press release that they permit the retention of an interest in or sponsorship of covered funds if the following qualifications are met:

• The TruPS CDO was established, and the interest was issued, before May 19, 2010;

• The bank reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in qualifying TruPS collateral; and

• The bank's interest in the TruPS CDO was acquired on or before Dec. 10, the date the agencies issued final rules implementing the rule.

The agencies said that they will accept comment on the interim final rule for 30 days following publication of the interim final rule in the Federal Register.

The other agencies were the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission.

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