Final Volcker Rule Places More Emphasis on Compliance Programs


Following over two years of comment and debate, the final Volcker Rule officially went into effect on April 1, 2014. While most banks have until July 21, 2015 to reach Volcker Rule compliance, those with over $50 billion in consolidated trading assets and liabilities are required to report to regulators beginning June 30, 2014.

Meanwhile, banks with less than $50 billion in trading assets are expected to undertake good-faith efforts to comply with the Volcker Rule regulations during the compliance period.

Moreover, the Federal Reserve Board (FRB) advises regulated entities not to expand their activities or investments during this time and to promptly end or divest any stand-alone proprietary trading operations.

The Volcker Rule was promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act in an effort to prevent the types of speculative investments that contributed to the 2008 financial crisis. The Volcker Rule prohibits banks from using their own funds to make certain types of investments to increase their profits.

Thus, the final rule prohibits banking entities from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments for their own accounts. It also prohibits banks from acquiring or retaining an ownership interest in or sponsoring a hedge fund or private equity fund.

The rule expressly permits certain trading and fund activity, including —

  • Underwriting activities;
  • Market making-related activities;
  • Risk-mitigating hedging activities;
  • Trading in government obligations;
  • Insurance company activities; and
  • Organizing and offering hedge funds and private equity funds.

Additionally, banking entities are permitted to act as an agent, broker or custodian.

The final rule places significant emphasis on compliance systems and procedures, particularly those designed to monitor permissible activities. Compliance requirements are based on the size of the bank and the scope of the activities:

  • Banking entities with no covered activities have no obligation to establish a compliance program until they begin to engage in such activities.
  • Larger banks — currently those with trading assets and liabilities exceeding $50 billion — must implement detailed compliance programs, and their chief executive officers must attest that such programs are reasonably designed to maintain compliance with the final regulations.
  • Smaller banks engaged in modest activities are subject to a more simplified compliance program as outlined in the regulations.

Given the complex nature of the rule, the establishment, oversight, maintenance and enforcement of a compliance program will be of utmost importance in avoiding Volcker Rule violations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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