Volcker Rule: First Look at the Proposed Regulation

Earlier this month the Securities and Exchange Commission joined three other federal agencies in proposing regulations to implement Section 13 of the Bank Holding Company Act, also known as the Volcker Rule. Part of the Dodd-Frank Act, the proposed rule would bar banking institutions from ‘proprietary trading’ (trading for benefit of the bank versus the client), and as such could have a significant impact on bank activities and results. For your reference, here’s a first look at the proposed rule, explained by lawyers and law firms on JD Supra:

– What does the Volcker Rule regulate?

It “prohibits banking entities … from (i) engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity’s own account, (ii) owning, sponsoring, or having certain relationships with, a hedge fund or private equity fund, (iii) engaging in an exempted transaction or activity if it would involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties, or that would result in a material exposure to high-risk assets or trading strategies, and (iv) engaging in an exempted transaction or activity if it would pose a threat to the safety and soundness of the banking entity or to the financial stability of the United States.” (From InfoBytes, October 14, 2011 – A Weekly In-depth Review of News & Developments in the Financial Services Industry by BuckleySandler LLP) 

– What does this mean for the rest of us?

“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 [covered banking entity] is unable to demonstrate this fact — then the activity is forbidden.” (From The Volcker Rule Proposal: An Initial Review by Morrison & Foerster LLP) 

– Which institutions are affected by the rule? 

“For purposes of the Volcker Rule, ‘banking entities’ include any depository institution insured by the FDIC, as well as any of the institution’s parents, affiliates and subsidiaries. This generally includes (i) FDIC-insured national or state banks, (ii) FDIC-insured savings associations, credit card banks and industrial loan companies, (iii) bank-holding companies (“BHCs”), (iv) savings and loan companies and (v) foreign banking institutions regulated as BHCs.” (From Proposed Volcker Rule and the Effect on Private Fund Sponsors and Investors by Ropes & Gray LLP) 

– When are the new rules scheduled to take effect? 

“[T]he Volcker Rule will become effective on July 21, 2012. The Proposed Rule provides that as a general matter, a banking entity must bring its activities and investments into compliance with the requirements of the Volcker Rule no later than July 21, 2014.” (From Volcker Rule Regulations Proposed by Dechert LLP) 


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