Financial institutions will have until July 21, 2014, to fully comply with the "Volcker Rule," which heavily restricts banks' proprietary trading and interests in hedge funds.  That is two years from the statutory effective date of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010, which is July 21, 2012. In response to requests by industry, the Federal Reserve Board said April 19 that it had approved a statement clarifying that "an entity covered by Section 619 of the [Dodd-Frank Act], or the so-called Volcker Rule, has the full two-year period provided by the statute to fully conform its activities and investments, unless the Board extends the conformance period." The four agencies in charge of writing the rule -- the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and the SEC -- have not yet adopted final rules. They have encountered stiff resistance from around the globe on how the rules are written, and have extended the public comment period as the page count of the proposed rule has ballooned. The Commodity Futures Trading Commission (CFTC) is working on its own version of the Volcker Rule.

But Congress is applying pressure on regulators to speed up finalization of the rule. On April 26, a strongly-worded letter (see sidebar) signed by 22 Democratic Senators, addressed to the five agencies stated, "We urge you to fully implement a clear, strong, and effective Volcker Rule without delay." The letter dismissed pleas by industry to take more care in writing the rules, saying, "Moreover, some argue that if the Volcker Rule is implemented properly, the financial markets will cease to function, forgetting that our financial markets became the envy of the world during the nearly 70 years that the Glass-Steagall Act was in effect," referring to the law that barred deposit-taking institutions from engaging in securities trading and other risk-taking on their own behalf. 

Why Was the Clarification Necessary?
The Fed's statement noted that Section 619 of the Dodd-Frank Act required the Fed to adopt rules governing when financial institutions' proprietary trading and other activities would have to be in compliance with the new provision. The Fed did on Feb. 9, 2011; however, the agency was later showered with comments from industry and requests for clarification on how the period would apply and how the Fed would enforce prohibitions of the Dodd-Frank Act. The April 19 clarification is a result of those requests. "It is an example of a federal regulatory agency thinking outside of the box and shows excellent lawyering on the part of the Fed," said Rebecca Laird, of counsel who specializes in banking law in the Washington, D.C. office of K&L Gates "It does no one any good to insist on compliance with a rule that hasn't been written and isn't final."

Letter from Senate to Regulators on ‘Volcker Rule'

Following is an excerpt from an April 26 letter signed by 22 Democratic members of the Senate -- describing themselves as "the original sponsors, co-sponsors and supporters of the effort to establish a strong wall between our nation's core banking system and high-risk, potentially conflicted trading activities" -- addressed to the five regulators writing the Volcker Rule, urging them to implement the Volcker Rule without delay.

The rule should be finalized this summer. The banks that will be directly impacted by the Volcker Rule have already had nearly two years to realign their businesses to comply with the broad contours of the rule, and may have already taken steps to do so. The statute itself provides for an additional two years -- extendable for up to five years -- for financial firms to come into compliance with the Volcker Rule. During the period, additional guidance may be offered as new data becomes available or with respect to particular provisions that may reuire deeper analysis, for example, prohibited conflicts of interest or high-risk trading strategies. Setting out this guidance now is the path to providing industry, investors, and taxpayers the certainty they want regarding how this important firewall will be applied.