Dear Clients and Friends:

In October, federal agencies proposed two new sets of regulations under the Dodd-Frank Act. The proposals — to implement the Volcker Rule and to create standards to designate certain nonbanks as systematically important financial institutions (SIFIs) — are expected to have profound consequences in the financial sector and on the broader economy. In this report, we explore the Volcker Rule and SIFI proposals and their potential implications for participants in the financial services industry.

The Volcker Rule is a central part of the legislative response to the financial crisis. It emerged from the premise that proprietary trading and sponsorship and investment in private funds by banking entities pose an unacceptable level of risk to the financial system. The Volcker Rule, as embodied by the proposed implementing regulations, can be viewed as an attempt to recreate the division between banks and securities firms established by the Glass-Steagall Act in 1933 (and repealed in 1999). Given how the financial system has since changed and the significant questions that the proposed regulations would leave unresolved, it remains to be seen whether that division proves to be a solution or an anachronism.

In the proposed nonbank SIFI standards, the Financial Stability Oversight Council has established an analytical framework to determine whether a particular nonbank institution is a SIFI in accordance with the factors specified in Dodd-Frank. The proposed rule illuminates some aspects of the process for designating nonbank SIFIs, but leaves the Council with significant discretion.

We hope you find this report helpful in your efforts to understand and adapt to the evolving financial regulatory environment. If you would like to discuss any of the matters analyzed here, please contact any of the authors or your usual Skadden, Arps contact.