Volcker Rule: U.S. Agencies Approve Final Volcker Rule, Detailing Prohibitions and Compliance Regimes Applicable to Banking Entities Worldwide

Sullivan & Cromwell LLP - January 27, 2014

On December 10, 2013, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC” and, together, the “Agencies”) approved a final rule (the “Final Rule”) implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), commonly referred to as the “Volcker Rule.”

The Volcker Rule—one of the centerpieces of the Dodd-Frank Act—imposes broad prohibitions and restrictions on proprietary trading and investing in or sponsoring hedge funds or private equity funds by banking organizations and their affiliates. As originally released (prior to publication in the Federal Register), the Final Rule and the detailed “Supplementary Information,” which is critical to understanding and interpreting the Final Rule, were more than 950 pages in total and included more than 2,800 footnotes.

In general, although many of the most unclear or troublesome provisions of the Agencies’ proposed rule (the “Proposed Rule”) have been addressed, there remain numerous interpretive issues and implementation challenges. The Final Rule is a sweeping regulation, with broad extraterritorial application, that will fundamentally shape how banking organizations do business. Although the Volcker Rule was principally directed at restricting the activities of certain large banking organizations, its restrictions apply to all banking organizations regardless of size, with limited accommodations for smaller banking organizations in the form of a simplified compliance program. Many of the Final Rule’s effects may become apparent only over several years as the Agencies exercise their substantial discretion to interpret and administer the Volcker Rule in practice.

In connection with the Final Rule, the Federal Reserve exercised its independent authority to grant a blanket one-year extension of the Volcker Rule conformance period for all banking organizations. As a result, banking organizations will have until July 21, 2015 to comply fully with most requirements of the Final Rule. An important exception applies for banking organizations with significant trading activities, which will be required to report quantitative metrics on their trading activities beginning as soon as July 2014. The extension order also requires banking organizations to use good faith efforts during the conformance period to conform to the Final Rule (and promptly terminate or divest any “stand-alone” proprietary trading operations).

This memorandum summarizes the requirements of the Final Rule and the related guidance in the Supplementary Information.