On July 21, 2015, following a long five-year proposal and comment period, the collection of restrictions imposed by Section 619 of the Dodd-Frank Act and the regulations thereunder (commonly referred to as the “Volcker Rule”) finally went into effect. The aim of the rule is to stop US banks and their global affiliates from engaging in unecessarily risky speculation and head off myriad conflicts of interest arising from proprietary trading and from investment relationships with hedge funds and private equity funds. While this may sound simple enough, even after the lengthy consideration of the rule, it is almost entirely unclear how the Volcker Rule will be enforced and by whom. Adding to the uncertaintly, because the final text of the Volcker Rule leaves so many interpretive questions remaining, it is almost impossible for banks to know if they are completely in compliance with the rule.
Section 619 of the Dodd-Frank Act gave five different agencies the task of jointly drafting and enforcing the Volcker Rule, with each agency responsible for crafting regulations for the entities over which they have regulatory or supervisory jurisdiction:
- the Board of Governors of the Federal Reserve System (the “Federal Reserve”),
- the Federal Deposit Insurance Corporation (“FDIC”),
- the Office of the Comptroller of the Currency (“OCC”),
- the Securities and Exchange Commission (“SEC”), and
- the Commodity Futures Trading Commission (“CFTC”) (collectively, the “Agencies”).
Now that the rule is final and in effect, however, it is unclear how the agencies will share enforcement duties. The enforcement provisions of the rule itself provide no truly new enforcement powers or expanded jurisdiction to any of the five agencies. Rather, the provisions merely refer to other existing powers of enforcement. However, not all of the five agencies have available to them the full set of powers the rule relies upon for enforcement.
The Volcker Rule appears to parcel out Volcker Rule enforcement fairly unevenly amongst the five agencies, with the SEC and CFTC receiving both the lightest enforcement load, and the fewest powers to enforce. This is not necessarily inappropriate because the Volcker Rule is primarily a banking rule, and the Fed, FDIC, and OCC are well equipped to deal with banks. On the other hand, the language of Section 619 still leaves a great number of financial institutions under SEC and CFTC responsibility. The SEC is allocated responsiblitiy for registered broker-dealers, investment advisers, security-based swap dealers, majority security-based swap participants, and investment companies. Similarly, the CFTC’s will oversee the rule's applicastion to swap dealers, major swap participants, futures commission merchants, commodity trading advisers, and commodity pool operators.
Some additional legal complexity appears to have severely curtailed the methods by which the SEC and CFTC can enforce the Volcker Rule limitations. Because the SEC and CFTC adopted their Volcker regulations pursuant to the Bank Holding Company Act rather than the the federal securities or commodities laws, both of the agencies likely will not be able to use the traditional enforcement methods they are accustomed to in enforcing the Volcker Rule.
This apparent gap in enforcement for the Volcker Rule is no secret, yet neither agency has taken steps to remedy it. We will have to wait until the first opportunity for enforcement to test whether the SEC and CFTC have what it takes to enforce outside their comfort zones.