"CFTC Proposes Regulations to Implement the Volcker Rule"

by Skadden, Arps, Slate, Meagher & Flom LLP

[authors: Mark D. Young, George M. Gilbert, Daniel S. Konar II]

On January 11, 2012, the Commodity Futures Trading Commission (CFTC) voted 3-2 to propose regulations to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), commonly referred to as the “Volcker Rule.” The CFTC’s proposal follows the October 2011 Volcker Rule regulations proposed by the Office of the Comptroller of the Currency, the Department of the Treasury (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC) in a joint release (Joint Release).

The Volcker Rule prohibits an insured depository institution (IDI), any company that controls an IDI, a bank holding company (BHC), and any subsidiaries or affiliates of IDIs or BHCs (collectively, “banking entities”) from engaging in proprietary trading, or acquiring or retaining an ownership interest in, or sponsoring, a hedge fund or private equity fund.1 The Volcker Rule and the regulations that were proposed to implement the Volcker Rule in the Joint Release were the subject of a Skadden Insights Special Edition last November. The CFTC’s proposal only would apply to banking entities that also are CFTC registrants.

Public comments on the CFTC’s proposed regulations may be submitted to the CFTC individually or jointly to the OCC, the Federal Reserve, the FDIC, the SEC and the CFTC.

Why is the CFTC proposing rules to implement the Volcker Rule?

The Dodd-Frank Act requires coordination by the federal banking agencies, the Federal Reserve, the SEC and the CFTC in developing and issuing the regulations to implement the Volcker Rule.2 For its part, the CFTC is required to promulgate regulations to implement the Volcker Rule for any banking entity for which the CFTC is the “primary financial regulatory agency.”3 The Dodd-Frank Act designates the CFTC as the primary financial regulatory agency for the following entities with respect to the activities that require registration under the Commodity Exchange Act (CEA): 

  • Registered swap execution facilities, swap data repositories, swap dealers and major swap participants; 

  • Registered derivatives clearing organizations; 

  • Registered futures commission merchants and introducing brokers; 

  • Registered commodity pool operators and commodity trading advisors; 

  • Registered retail foreign exchange dealers; and 

  • Any “registered entity” under the CEA.4  

The Dodd-Frank Act also designates the CFTC as the primary financial regulatory agency for any board of trade that is designated as a contract market and any registered futures association. Accordingly, if any of the above-listed entities also is a “banking entity” (either through its status as an IDI or BHC, as affiliate or a subsidiary of an IDI or a BHC, or otherwise by virtue of controlling an IDI), then it is subject to the Volcker Rule and any implementing regulations adopted by the CFTC.

Does the CFTC’s proposal differ substantively from the Joint Release?

The CFTC has proposed the same Volcker Rule regulations (and appendices) that were proposed by the banking agencies, the Federal Reserve and the SEC in the Joint Release, subject to one substantive difference.5 The CFTC omitted from its proposed regulations Subpart E, which was included in the Joint Release by the Federal Reserve, acting alone, to incorporate rules regarding conformance periods for entities supervised by the Federal Reserve.

The CFTC has characterized the overview and section-by-section analysis in the preamble to its proposal as being “substantively consistent” with the same overview and analysis in the Joint Release, with the exception of 14 additional questions.6 The CFTC has explained that any other discrepancies in these sections “are solely for stylistic purposes and are not intended to create any substantive differences between these sections of the [CFTC’s proposed Volcker Rule regulations] and the Joint Release.”7

How many entities would be subject to the CFTC’s Volcker Rule regulations?

The CFTC’s proposal does not identify how many entities would be subject to the CFTC’s Volcker Rule regulations.8 While such information would ordinarily be included in a CFTC rulemaking as part of the CEA’s required discussion of costs and benefits,9 the CFTC stated that it has omitted such discussion because its Volcker Rule regulations are proposed exclusively under the Bank Holding Company Act of 1956, as amended (BHC Act), not the CEA.10

Further, the CFTC’s proposal does not account for the burdens of the information collections that would be required by the Volcker Rule regulations (as would ordinarily be required by the Office of Management and Budget) because such burdens were considered by the OCC and the Federal Reserve in the Joint Release.11

Would the CFTC’s proposal narrow the scope of “covered funds” where commodity pools are concerned?

The Volcker Rule, subject to certain exceptions, prohibits a banking entity from sponsoring or investing in a hedge fund, a private equity fund or such “similar funds” as the banking agencies, the Federal Reserve, the SEC and the CFTC determine appropriate.12 The Joint Release proposed to refer to these collectively as “covered funds” and would specifically include commodity pools in the “covered funds” definition by way of the authority to designate similar funds. However, given the breadth of the definition of “commodity pool,” this proposed definition of “covered funds” has the potential to extend the Volcker Rule’s prohibition to entities not traditionally considered to be hedge funds or private equity funds. The potential implications of the definition of a “covered fund” in the Joint Release are explained further in our Skadden Insights Special Edition.13

The CFTC proposal would not narrow the scope of “covered funds.” Rather, the CFTC has proposed a definition of a “covered fund” that is identical to the definition proposed in the Joint Release. The CFTC’s only contribution to the definition of a “covered fund” comes in the form of an additional question, Question 218.1, which asks: “Is the use of [the] definition of ‘commodity pools’ [in the definition of a ‘covered fund’] too broad? For example, will this definition potentially pull in additional pools that may be outside the intent of the proposed regulations?”14 This additional question may be a recognition of the industry reaction to the proposed definition of “covered funds” in the Joint Release and an invitation for the industry to use the comment period to propose a more appropriate alternative.

What is the Impact of the CFTC’s Proposal?

The CFTC’s Volcker Rule regulations were proposed three months to the day following the issuance of the Joint Release. Given this delay, some had anticipated that the CFTC’s proposal would attempt to address some of the issues identified in the Joint Release. Overall, the CFTC’s proposed regulations have not provided any further clarity as to how the Volcker Rule might be applied in practice.


1 Dodd-Frank Act § 619(a), 12 U.S.C. 1851(a). The Volcker Rule also imposes additional restrictions on nonbank financial companies that are supervised by the Federal Reserve, including companies that the Financial Stability Oversight Council has determined shall be subject to supervision by the Federal Reserve pursuant to Section 113 of the Dodd-Frank Act. 

2 Dodd-Frank Act § 619(b)(2)(B); 12 U.S.C. 1851(b)(2)(B). 

3 Dodd-Frank Act § 619(b)(2)(B)(i)(III); 12 U.S.C. 1851(b)(2)(B)(i)(III). 

4 Dodd-Frank Act § 2(12)(C). 

5 Proposal at 354. 

6 The CFTCs additional questions are numbered: 8.1, 14.1, 30.1, 30.2, 64.1, 87.1, 88.1, 168.1, 168.2, 177.1, 218.1, 227.1, 296.1 and 302.1. 

7 Proposal at 6 (footnote 13). Additionally, during the CFTC’s open meeting, Chairman Gensler and staff emphasized the importance of consistent application of the Volcker Rule regulations across regulatory agencies. Transcript at 184, 203, 213 and 230. 

8 Further, during the January 11, 2012, meeting, staff stated they did not know how many registered entities would be subject to the CFTC’s Volcker Rule regulations. Transcript at 212. 

9 7 U.S.C. § 19(a). 

10 Section 619 of the Dodd-Frank Act amends Section 13 of the BHC Act. Therefore, the CFTC’s statutory authority to promulgate Volcker Rule regulations arises from the BHC Act, not the CEA. 

11 Proposal at 305 (footnote 359). 

12 Dodd-Frank Act § 619(h)(2); 12 U.S.C. 1851(h)(2). The Volcker Rule defines a hedge fund and a private equity fund as “an issuer that would be an investment company, as defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for section 3(c)(1) or 3(c)(7) of that Act, or such similar funds. …” Id.

13 Skadden Insights Special Edition at 24. A “commodity pool” is defined as any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests.” 7 U.S.C. 1a(10). The definition of “commodity pool” is broad enough to include, for example, mutual funds, exchange traded funds and real estate investment trusts — none of which generally would be thought of as similar to hedge funds or private equity funds. 

14 Proposal at 206. 

Download PDF Version


Written by:

Skadden, Arps, Slate, Meagher & Flom LLP

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.