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After four years of fervent public debate and intense regulatory deliberation, Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), known as the Volcker rule (the rule), was approved by all five of the required federal agencies on Dec. 10, 20131. The rule — modified from a proposal published in late 2011 — restricts a banking entity’s trading activities and defines what is a permissible investment for a banking entity. Coupled with the compliance challenges and costs imposed by other parts of the Dodd-Frank Act, the rule will create a significant hurdle for midsize and large banking entities as they strive to regain historical levels of profitability.
Limits on trading activities
Subject to various exemptions, the rule prohibits banking entities from engaging in proprietary trading — defined as “engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments.” Many of the terms in that definition are further defined in Subpart B – Proprietary Trading Restrictions2.
The rule prohibits a banking entity from having an “ownership interest” in, sponsoring, or having certain relationships with hedge funds or private equity funds (termed “covered funds”). Additional information about this aspect of the rule can be found in Subpart C – Covered Fund Activities and Investments. The rule is effective as of April 1, 2014. However, the conformance period has been extended to July 21, 2015 — an acknowledgment by regulators of the difficulty banking entities face in complying with the rule.
Will your organization be ready? In The Volcker Rule: A complex compliance challenge, we highlight certain considerations you should be aware of as you prepare to comply with the rule.