Ever since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, banking organizations (and some nonbank financial institutions) have attempted to determine the breadth and impact of the Volcker Rule. This rule, now section 13 of the Bank Holding Company Act, generally prohibits a covered banking entity (“CBE”) from proprietary trading and from investing in or controlling private equity or hedge funds. Long-awaited guidance is now at hand. Earlier this week, the Federal Reserve Board (“FRB”), the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”) and the Securities and Exchange Commission (“SEC”) (collectively, the “Agencies”) all approved a proposed regulation (the “Proposed Rule”) for publication. The Commodities Futures Trading Commission (“CFTC”) is expected to release its own proposal to implement the Volcker Rule in the near future.

The Proposed Rule sweeps more broadly than the Volcker Rule requires but provides some greater specificity on certain provisions of the Act. The Proposed Rule could have a severe impact on trading or fund ownership or control by banking institutions and others. In a very general sense, the Proposed Rule purports to accommodate trading or fund sponsorships for the benefit of, and where the underlying risks are borne by, customers. If any of these activities are not “for” customers — or if a CBE is unable to demonstrate this fact — then the activity is forbidden. Permitted activities are subject to an array of restrictions and compliance requirements.