The Volcker Rule’s Trojan Horse for Smaller Banking Entities

The final rules recently enacted to implement the Volcker Rule (‘‘the Final Rules’’) impose on the largest banking entities a highly detailed and complex compliance regime. As to those so-called ‘‘less active banking entities,’’ that is, the smaller banking entities and those not engaged in any proprietary trading activities at all, the Final Rules appear to provide relief from that compliance regime. Compared to the proposed rules that were issued over two years ago, this ‘‘simplified program’’ seems like a gift from the enacting agencies (the ‘‘Agencies’’), who appear to be taking a less prescriptive approach to compliance at those smaller banking entities. But upon closer analysis, the ‘‘gift’’ begins to look like a Trojan Horse, that will still require the less active banking entities to have a compliance program that addresses the Volcker Rule’s restrictions, even when the entity is engaged in limited or no activities covered by the Rule.

I. The Volcker Rule’s Compliance Regime -

The Volcker Rule generally prohibits a banking entity from engaging in proprietary trading and from acquiring or retaining an ownership interest in or sponsoring a hedge fund or private equity fund. The Volcker Rule expressly permits certain trading and fund activity – notably, underwriting activities, market making-related activities, and risk-mitigating hedging activities. The Final Rules impose compliance and reporting requirements for banking entities ‘‘to prevent violation or evasion of the prohibitions and restrictions on proprietary trading activities and covered fund activities and investments.’’

Originally published in BNA’s Banking Report.

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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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