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The Volcker Rule Is (Finally) Here

Back in 2011, I wrote about Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the "Volcker Rule."  (See Do Community Banks Need to Worry About the "Volcker Rule"?)  At that time, the SEC and the federal banking regulators had just issued a proposed rule for public comment.  Two years later, the final rule is being released.  To say the rule is behind schedule is a bit of an understatement--the Act required the agencies to promulgate a final rule by July 21, 2011. 

Remember the Volcker Rule?
Given the amount of time since the Volcker Rule was proposed, it seems appropriate to refresh our recollections as to the history and intent of the rule.  The Volcker Rule is a concept advocated by the eponymous former Federal Reserve Board Chairman Paul Volcker, who argued that proprietary securities trading by federally-insured banks introduced unacceptable risk to the Deposit Insurance Fund.  In simple terms, Volcker argued that because bank deposits are backed by a government assurance (the Deposit Insurance Fund), banks should not engage in trading that exposes the DIF to (much) risk. 


In 1933, the Glass-Steagall Act forced a separation of commercial banking from investment banking and brokerage activities. This division more or less remained the rule until the Gramm-Leach-Bliley Act of 1999.  Some observers attributed the repeal of the Glass-Steagall restrictions to the financial crisis of 2008, and the Volcker Rule found its way into the massive reform bill known as the Dodd-Frank Act.

The Final Rule

Section 619 of the Dodd-Frank Act contains restrictions on a financial institution's ability to engage in "proprietary trading" or be associated with a private equity/hedge fund.  Proprietary trading is defined as “trading activity” in which a “banking entity” acts as “principal” in order to profit from “near-term” price changes.   Banks often take positions in government securities as a way to invest cash productively and safely, or as a risk-management tool, and concerns arose that the Volcker Rule would cover such trading.

Following considerable input from the banking sector, the final rule differs from the original proposal in some important ways.  Below are some highlights of the final rule.

- The final rule exempts proprietary trading in securities issued by the U.S. Treasury, Government-Sponsored Enterprises, municipalities and the FDIC.
- Banks with less than $10 billion in assets that do not trade in covered instruments are exempt from the compliance program requirements of the rule, and CEOs are not required to submit an attestation that their banks have a sufficient compliance program in place.
- Banks under $10 billion that do engage in covered activities can meet the "compliance program" requirements by simply including references to the Volcker Rule in their existing policies and procedures addressing only the activities that the community bank actually conducts. 
- Also exempt are trading activities:
  • as agent, broker or custodian;
  • through a deferred compensation or pension plan;
  • as trustee or in a fiduciary capacity on behalf of customers;
  • to satisfy a debt previously contracted;
  • repurchase and securities lending agreements; and
  • risk-mitigating hedging activities. 
The Clock Is Ticking

The final Volcker Rule becomes effective April 1, 2014 (though the complete compliance deadline has been pushed back for banks under $10 billion to July 21, 2015).   

For more information, you can read the entire final Volcker Rule here (a mere 964 pages).

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