Section 619 of the Dodd-Frank Act (“Act”), otherwise known as the “Volcker Rule (the “Rule”),” contains some of the most wide-sweeping and controversial provisions of the entire law. Basically, the Rule places restrictions on the proprietary trading and investment activities of insured depositories and their affiliates and subsidiaries. The purpose of this blog post, however, is not to analyze the content of section 619 and the proposed authorizing regulations. There has already been, and there necessarily will be, a great deal more said along those lines. Rather, in light of the complexity of the subject matter and the significance of the process associated with developing a final rule, this post intends to hit a more narrow target: to help the reader understand the timing and process for the finalization of the rule.
Section 619 not only contains the substantive provisions of the Volcker Rule, but it also sets forth a very specific schedule for finalizing the regulations and even provides an explicit statutory effective date.
The first statutory step in this process is contained in section 619(b)(1), which required the Financial Stability Oversight Council (“FSOC”) to study and make recommendations on implementing the Volcker Rule within six months from the passage of the Act. The FSOC met this responsibility and issued an 81-page report in January 2011. Completion of the study then triggered the next phase of the process, requiring that the bank regulators, the Securities and Exchange Commission (“SEC”), and the Commodities Futures Trading Commission (“CFTC”) propose enacting rules within nine months of the study. The bank regulators and the SEC met this deadline, publishing a nearly 300-page rule proposal (which contained approximately 1,300 questions relating to 400 topics) in October 2011. The CFTC published its proposed rule in February 2012.
The rule proposed by the bank regulators and the one proposed by the CFTC have received thousands of letters from a number of commentators, with a huge variety of perspectives. In fact, many of the thousands of comment letters are themselves hundreds of pages long. The regulators are now working through this voluminous amount of information as part of their effort to finalize the rule. Whether they have time to carefully consider all the comments, however, is not clear. This is because sections 619(c)(1)(A) and (B) provide that the Rule becomes effective on the earlier of 12 months after the issuance of final rules or two years after the date of enactment. The Act was passed July 21, 2010. Therefore, as things currently stand, the statute becomes effective within the next four months if the rules are not finalized.
The key question becomes then, “What will come first — final regulations or the two-year anniversary of the passage of the law?” Perhaps the best source on timing is Federal Reserve Board Chairman Ben Bernanke, who, while testifying before the House Financial Services Committee last month, indicated “I don’t think it (the Volcker Rule) will be ready for July.” Additionally, Federal Reserve Board Governor Daniel Tarullo noted last month in testimony before the Senate Banking Committee that “there is obviously a real possibility that we do not meet the July 21st date.”
Assuming that Chairman Bernanke and Governor Tarullo are correct, covered institutions will apparently have the responsibility of dealing with the compliance requirements of one of the most technical and difficult provisions of law without the help of clarifying regulations.
This obviously would create a very difficult situation for such firms. That said, at least two mechanisms appear to be available to provide assistance. The first, and the one most likely to be available, involves the regulators providing a combination of guidance and forbearance during the period after the Rule becomes effective and before final rules are promulgated. Under this scenario, the regulators would provide informal guidance to covered entities, so that they could conform their activities to regulatory expectations. Governor Tarullo, at the same Senate hearing where he noted that the deadlines could be missed, indicated that, “If we are not going to (meet the deadlines), I think it is incumbent on all the regulators to provide some guidance for firms to let them know exactly what the expectations will be and not let this hang out there as an unknown and I think we should be able to do that as needed.”
Secondly, bi-partisan legislation was recently introduced that would amend the Act to make the effective date the later of two years after enactment or 12 months after the date of the issuance of final rules. S. 2223, which was sponsored by Sen. Crapo and co-sponsored by Sens. Warner, Toomey, Hagan, Corker and Carper, would provide the regulators the ability to complete all the work necessary on the regulations prior to the Rule becoming effective. Firms would have the benefit of relying on completed regulations when developing their compliance regimes. At this point, no hearings have been scheduled on this legislation.
At a minimum, it appears that the regulators are aware of the difficulties that the lack of completed regulations present to the firms subject to the Volcker Rule. To address the uncertainties prior to completing the regulations, the regulators will very likely provide some form of guidance to these firms. The Reed Smith team is ready to help covered institutions respond to and implement whatever guidance they are so provided.
Additionally, the mere existence of bi-partisan legislation that addresses the timing of the effectiveness of the Volcker Rule should provide support. In the event the bill passes, covered firms and the regulators will be afforded the additional time to complete the regulations after having considered every aspect of the comments. Furthermore, a bi-partisan bill, even one that is not taken up and considered, demonstrates that there is the will in Congress for allowing the regulators to get the rules “right” in due course. This provides the regulators with an element of “cover,” and that cover may be all they need to finalize the regulations before the Rule is ultimately effective.
Mark F. Oesterle is a member of the Financial Services Regulatory Group at Reed Smith LLP, resident in the Washington D.C. office. Prior to joining Reed Smith, Mark served as Chief Minority Counsel for the U.S. Senate Committee on Banking, Housing and Urban Affairs. He joined the U.S. Senate Committee as Counsel in 2001, serving as Chief Counsel and Republican Deputy Chief of Staff, Parliamentarian, senior advisor to the Chair, and counsel to the Financial Institutions Subcommittee during his tenure of more than a decade.