Volcker Rule – The Questions We Can (and Cannot) Answer

Paul Volcker, former chairman of the Economic Recovery Advisory Board under President Obama, had taken on Wall Street greed:  he was extremely critical of big bank speculation and called for greater regulation of the industry. Volcker backed legislation that would restrict the high-risk investments of big banks which jeopardized their clients’ portfolios. The eponymous rule ultimately grew from that legislation, as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Volcker Rule prohibits banks and their affiliates from (1) engaging in proprietary trading in most securities and derivatives and (2) owning an interest in or sponsoring a private investment fund. In part, it forces banks to forego collateralized debt obligations (CDOs) backed by trust-preferred securities (TruPS). The goal of the Volcker rule was to regulate the risk-taking by large Wall Street banks, for which the recent financial downturn is blamed. By forcing all banks to rid themselves of CDOs backed by TruPS, however, the rule could end up punishing smaller banks.

Federal regulators noted this discrepancy and on January 14th revised the rule so that community and otherwise small banks would not have to relinquish securities in which they had invested before the financial crisis.

Attorneys and other professionals in finance, securities, and banking are scrambling to understand the intricacies of the Volcker Rule. Which entities does the Volcker Rule cover? What, exactly, is “proprietary trading”? How is the Volcker Rule applied to foreign banks or systemically important non-bank financial companies?

American Law Institute CLE offererd these professionals a thorough look at the Volcker Rule in “The Final Volcker Rule: What is at Stake?” on January 24, 2014. This program is now available on demand on the ALI CLE website

According to A. Patrick Doyle, Esq., an expert in financial institute regulation and planning chair of the program, “The Volcker Rule is massive and it is complex and it will likely take months if not years to truly master. We are already seeing the impact of some of the unintended results of the Rule with the CDO/TruPS issue. How many more unintended results will there be as  people begin to comprehend its scope and coverage is a question I’m afraid no one at this time can answer.”

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