It took almost 3½ years before it finally hatched. And it was big—very big—enormous, in fact. No, it’s not Godzilla. It’s the Volcker Rule.
More than two years after the Notice of Proposed Rulemaking, a final rule (variously, the Final Rule or the Volcker Rule) implementing Section 13 of the Bank Holding Company Act (added by the 2010 Dodd-Frank legislation) was released on December 10, 2013. Five agencies were involved in issuing the rule: the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Office of the Comptroller of the Currency. The rule is the brainchild of former Fed Chairman Paul Volcker, and its principal idea is to prevent banks from “gambling” while enjoying the benefits of the subsidy conferred by insured deposits.
As required by Dodd-Frank, the Final Rule prohibits a “banking entity” from two broad categories of activities:
Engaging in proprietary trading of financial instruments (i.e., the purchase or sale of securities, commodity contracts (including FX swaps and forwards), derivatives, or options) for its own “trading account” (as defined in the Final Rule) with the idea of profiting from short-term price movements
Owning and sponsoring hedge funds and certain private equity funds (known as “covered funds”)
The rule defines “banking entity” as:
Any insured depository institution (i.e., a commercial bank or a thrift)
Any company that controls an insured depository institution (i.e., a bank holding company or a savings and loan holding company)
Any company that is treated as a bank holding company under the International Banking Act of 1978 (i.e., a company that is or controls a non-U.S. bank with branches or agencies in the United States)
An affiliate or subsidiary of any of the above
As usual, the devil is in the details. There are a significant number of exceptions and exemptions. This terrain is, however, in large part unchanged from the rule as originally proposed and is covered comprehensively in the nearly 1,000 pages of preamble and supplementary information (with more than 2,800 footnotes) accompanying the Final Rule, which itself exceeds 70 pages.
While the Proposed Rule required banking entities to implement significant compliance programs, the Final Rule gives some relief to smaller institutions but expands the obligations of large institutions (typically those with $50 billion or more in total consolidated assets). Large institutions are subject to an expanded corporate governance and oversight requirement for boards of directors, CEOs, and senior management; this includes a requirement for an annual CEO certification.
All of this may initially have created some regulatory indigestion around the holidays for lawyers, consultants, and other advisers of banking entities, although there is ample time for detailed perusal of the Final Rule and consideration of how clients can manage compliance. Given that the Final Rule extends the compliance date for most of its requirements until July 21, 2015, there is, for the most part, no compelling reason to race to the courthouse and seek to invalidate the Volcker Rule in whole or in part via judicial review.
Nevertheless, the American Bankers Association has already leveled some very targeted criticism of the Final Rule regarding its impact on investments in trust preferred collateralized debt obligations (CDOs). Dissatisfied with the agencies’ responsiveness to its concerns, the trade association on December 23 filed, according to Reuters, a petition seeking judicial review in the U.S. Court of Appeals for the District of Columbia Circuit.
Ballard Spahr will follow these and other developments relating to the Volcker Rule and plans to conduct a webinar on the subject in February 2014.