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The Volcker Rule: A Legal Analysis

CRS – The Volcker Rule: A Legal Analysis, David H. Carpenter, Legislative Attorney; M. Maureen Murphy, Legislative Attorney. March 27, 2014.

“On December 10, 2013, more than two years after the statutorily mandated deadline, five federal financial regulators published final regulations (hereinafter, the regulations) implementing  Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter, Section 619 or the statute). Together these are known as the Volcker Rule (hereinafter, the Volcker Rule or the Rule), which is designed to prohibit banks and their affiliates from engaging in risky, short-term, speculative trading and investing in private equity and hedge funds. These are practices long condemned by the Rule’s namesake, former Federal Reserve Chairman Paul A. Volcker, for being at odds with conventional banking principles and potential risks to overall financial stability that could trigger the need for future bailouts. The same day that the regulations were issued, the Federal Reserve Board (FRB) set the date when conformance with the Rule is required as July 21, 2015, although that date could be extended an additional two years, and banking institutions and their affiliates are under an obligation to undertake good faith efforts to meet that date with full compliance. The Volcker Rule, which according to an analysis by one of the issuing regulators might impose significant costs on covered institutions, prohibits “banking entities” from engaging in “proprietary trading” and from making investments in or having relationships with hedge and similar “covered funds” that fall into certain exemptions from registering with the Commodity Futures Trading Commission (CFTC) as commodity pool operators or with the Securities and Exchange Commission (SEC) under the Investment Advisors Act. In concert with these broad prohibitions, the Rule carves out numerous exclusions and designates myriad activities as permissible so long as various terms and conditions are met. The statutory language provides only general outlines of prohibited activities and exceptions, while empowering the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the SEC, and CFTC (together, the federal financial regulators or the Agencies) to issue coordinated rulemakings to fill in the details and complete the difficult task of crafting regulations to distinguish prohibited activities from activities considered essential to the safety and soundness of banking institutions or to the maintenance of strong capital markets.”

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