What every business lawyer should know about the final Volcker rule
As Paul Volcker, former chairman of President Barack Obama’s Economic Recovery Advisory Board, famously said, high-risk trading is “like pornography — you know it when you see it.”
Yet, as participants learned in a recent American Bar Association program, the new provisions laid out in the Volcker rule — a complex and controversial regulation that purports to keep large banks from gambling with their customers’ money — are anything but obvious.
Sponsored by the ABA Business Law Section’s Banking Law Committee, the program, “What Every Business Lawyer Should Know About the Final Volcker Rule,” detailed the ins and outs of the newly completed regulation. Ernie Patrikis, an attorney with White & Case LLP in New York, summed up the panelists’ conclusions thusly: “Lawyering for the next year of the Volcker rule is going to be a dangerous art.”
The Volcker rule, finalized in December 2013, prohibits banking entities and their affiliates from engaging in proprietary trading, or acquiring or retaining an ownership interest in a hedge fund or a private equity fund. Five federal agencies worked together on the rulemaking — and each of the agencies also will be charged with enforcement. However, it has not yet been determined how the agencies will work together to uniformly apply or interpret the provisions of the rule, or which agency will supervise compliance.
While the compliance deadline is July 21, 2015, banking entities with the largest proprietary trading activities (U.S. entities with $50 billion or more in trading assets globally and non-U.S. banking entities with $50 billion or more) will be required to begin reporting various metrics this July. For those with less than $50 billion in trading assets, reporting won’t begin until 2016.
“The compliance infrastructure is incredibly intricate and complex,” said panelist Heath Tarbert, an attorney with Allen & Overy LLP in Washington. “Some say it gives arcane aspects of the tax code a run for its money.”
As with most regulations, the devil is in the details — and with the Volcker rule, those bring up more questions than answers. Questions such as: What is considered a banking entity and affiliate? What activities are defined as proprietary trading? What entails ownership interest? What sort of financial instruments are covered?
“The rule is incredibly broad,” said panelist Arthur Long, an attorney with Gibson Dunn & Crutcher LLP in New York. “With that breadth, how do you determine permitted activity versus prohibited proprietary trading?”
Permitted activities include underwriting, market-making, risk-mitigating hedging and trading on behalf of customers, insurance companies and foreign banking entities. Meanwhile, the rule prohibits proprietary trading that would involve or result in a material conflict of interest, result in material exposure to high-risk assets or high-risk trading activities, or pose a threat to the safety and soundness of any banking entity in the U.S.
However, what makes the regulation especially tricky is the fact that it’s principles-based.
“The vagueness does threaten to over-deter permitted activity,” Tarbert noted.
Because the difference between permitted and prohibited proprietary trading is considered by many to be ambiguous, banking entities are warned that there could be widely different approaches to enforcement from the five federal agencies involved.
This means that the business lawyer’s role will remain especially important.
“It is incumbent on the bar to provide an informed, reasonable view that allows our clients to in good faith comply with the Volcker rule but at the same time allows us to step forward,” Tarbert said.
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