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Financial Regulators Adopt Rules Implementing the Volcker Rule

Earlier this week, the SEC and the other financial regulators issued final rules implementing the “Volcker Rule” as required by the Dodd-Frank Act.  The rules prohibit “banking entities” from short-term trading in certain securities, derivatives, commodity futures and options for their own accounts.  In addition, the rules limit the banking entities’ investments in and certain relationships with hedge funds and private equity funds.  The rules do provide exemptions for certain types of trading, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds.  The rules also are clear that acting as agent, broker, or custodian is not prohibited.

SEC Commissioners Gallagher and Piwowar dissented from the rules’ adoption. 

Commissioner Gallagher, who has been vocal about his concerns regarding the process surrounding the implementation of the rules, expressed concern that the SEC and other banking agencies have “been commanded to ‘err on the side of doing a little more, and then correct it if you’ve gone too far’ in implementing the mandates of Dodd-Frank.”  He cited a “staggering level of hubris reflected throughout this joint rulemaking process, which has culminated with a purely political insistence on a pre-year end vote.”  Among his concerns about the procedural steps surround the rules’ adoption, was the fact that the Commissioners did not receive “anything resembling a voting draft” until five days before the vote.  He also took issue with other procedural issues surrounding the release, including his belief that the rules should have been reproposed in light of the number of questions contained in the proposing release and the staggering number of comments, that banking regulators had the lead rule in the implementing regulations, and the “meager” economic analysis in the adopting release.

Commissioner Gallagher took little comfort in the fact that the implementing rules could be corrected if they had gone too far.  He stated,

This assurance is based on a bank-centric view of regulation and a dangerous misunderstanding of the Commission’s regulatory program.  Prudential regulators such as the banking agencies can indeed employ their discretion in seeking to obtain their desired regulatory outcomes. . . The Commission’s rules-based regulatory regime, however, contains no wiggle room.  Our rules are rules, and when our examiners come across a rule violation, whether egregious and intentional or peripheral and accidental, they are required to record such violations.  We cannot and should not be engaging the recently vogue practice of selectively enforcing the law.