Volcker Rule: Federal Banking Agencies and CFTC Approve Notice of Proposed Rulemaking to Amend Volcker Rule Regulations; SEC Expected to Follow

Sullivan & Cromwell LLP - June 5, 2018
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On May 30, 2018, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) approved a notice of proposed rulemaking to amend the regulations implementing the so-called “Volcker Rule” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Each of the other agencies responsible for implementing and enforcing the Volcker Rule (collectively with the Federal Reserve, the “Agencies”) subsequently approved or is expected to approve in the very near term a substantially similar notice of proposed rulemaking (collectively with the Federal Reserve’s notice of proposed rulemaking, the “NPR”).

The NPR follows recent statements by representatives of the Agencies, a 2017 report on financial reform by the U.S. Department of the Treasury (the “Treasury Report”) and a public comment process initiated by the OCC (the “OCC RFI”) following the Treasury Report, each of which highlighted concerns that the current Volcker Rule regulations are overly complex and should be tailored to reduce compliance costs and clarify the application of the regulations. The NPR also comes shortly after Congress’s May 24, 2018 enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Reform Act”), which exempts certain smaller banking entities from the Volcker Rule entirely.

We believe that there are two key takeaways from the NPR:

  • First, the NPR proposes limited and targeted changes to the proprietary trading and compliance program provisions of the Volcker Rule regulations and, to a significantly lesser extent, the covered funds provisions. The Agencies’ stated objectives for these changes include streamlining and clarifying the application of their regulations and tailoring the compliance program and certain other requirements based on the size and scope of a banking entity’s trading activities. For example, a banking entity with less than $10 billion in gross trading assets and liabilities would be subject to a substantially simpler compliance program requirement than a banking entity that exceeds this threshold, and banking entities with less than $1 billion in gross trading assets and liabilities would benefit from a “presumption of compliance” with all aspects of the regulations. If adopted in the form proposed in the NPR, however, the amendments would provide a lesser degree of relief to the firms most affected by the Volcker Rule, including larger and mid-sized banking entities. Furthermore, the proposed changes to the proprietary trading provisions will need to be carefully analyzed by individual banking organizations in order to assess the impact on their businesses and operations.
  • Second, many recommendations and concerns raised in the Treasury Report, the OCC RFI and industry comment letters—especially with respect to the covered funds provisions—are not addressed in any proposed amendment but instead are discussed only in certain of the 342 separately numbered questions (and multiple subquestions) posed in the preamble to the NPR’s proposed amendments (the “Preamble”). 
The ultimate scope and contour of many significant aspects of the Volcker Rule regulations remain open questions and should be influenced by the comment process that will follow publication of the NPR. Comments on the NPR will be due 60 days following publication in the Federal Register.