On October 11, the Federal Reserve Board and the Federal Deposit Insurance Corporation requested public comment on a proposed regulation implementing the so-called "Volcker Rule" requirements of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, Section 619 generally contains two prohibitions. First, it prohibits insured depository institutions, bank holding companies, and their subsidiaries or affiliates (banking entities) from engaging in proprietary trading of any security, derivative, and certain other financial instruments for a banking entity’s own account, subject to certain exemptions. Second, it prohibits owning, sponsoring, or having certain relationships with, a hedge fund or private equity fund, subject to certain exemptions.

The proposal, which was developed jointly with the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, "clarifies the scope of the act’s prohibitions and, consistent with statutory authority, provides certain exemptions to these prohibitions." The proposal is 298 pages long and contains 394 questions on which comment is invited.

Reaction of the American Bankers Association was swift and critical. New ABA President and CEO Frank Keating commented: "The banking industry fears the oversized nature and complexity of this proposed rule will make it unworkable and will further inhibit U.S. banks’ ability to serve customers and compete internationally. Regulators’ own estimates indicate banks will have to spend nearly 6.6 million hours to implement the rule, of which more than 1.8 million hours would be required every year in perpetuity. That translates into 3,292 years, or more than 3,000 bank employees whose sole job will be complying with this rule. They will be transferred to a role that provides no customer service, generates zero revenue and does nothing for the economy."

On October 12, the Securities and Exchange Commission voted unanimously to issue the Volcker Rule for comment. SEC Commissioner Paredes supported issuing the rule for comment, but expressed four major concerns:

  • The rule curtails market making at the expense of liquidity and capital formation.
  • These limitations put domestic banks at a competitive disadvantage to foreign institutions.
  • The compliance burden is unrealistic and excessive.
  • “Hedge funds” is not defined narrowly enough.

A very brief summary of the proposed rule may be found here. The proposed rule itself may be found here. Comments are due before January 13, 2012.