Last week a group of about 100 CEOs asked the Obama administration to slash a number of Dodd-Frank provisions expected to roll out in July. The main criticism–and also the loudest throughout the industry–focused on the Volcker Rule. This is not the first attack on the maligned rule, but it does come at a time when the SEC is considering starting from scratch. These CEOs join other members of the financial industry urging the demise of the Volcker Rule. That, combined with the 17,000 comments received by the regulators, have forced back the rule’s implementation date.
The crux of Volcker turns on its ban of banks trading with their own money (or with their own “trading accounts”), rather than client money. The rule would apply to proprietary trading by U.S. banks no matter where the trading occurred–even outside the United States. Non-U.S. banks would have Volcker obligations as well, but only as to their proprietary trading in the U.S. or involving a U.S. resident. The complaints about the rule run the gamut–relating, for example, to the leeway given to regulators to broaden the scope of key terms, such as “trading accounts,” and to the restrictions on banks’ ability to own or acquire an interest in, or sponsor, hedge funds or private equity funds.
The banks have expressed concern that the restrictions are so broad that they could interfere with the their ability to facilitate trades for clients; that it limits their ability to provide investment management products and services to compete with non-banking firms; and that it unfairly restricts short-term trading by U.S. banks involving their trading accounts. Ultimately, the argument goes, banks will have to raise transaction fees to make up for their lost profits from trading, raising costs on investors. And if banks are no longer able to accept certain types of risks, then those risks will be passed to investors–with a host of additional, potentially very negative consequences.
(Of course, there are exceptions to the rule. Specifically, it allows for trading in government securities, underwriting and “market making” to the extent that does not exceed client demands. The Rule also allows banks to hedge risk and invest in small business investment companies. Finally, the Volcker Rule also has a vague exception for investments in the public welfare.)
The CEOs also wrote of their concern about the uncertainty created by the Volcker rule--to whom it applies, how it will affect banks and how best to comply. Given this uncertainty, banks are estimating that the aggregate costs of compliance could total nearly $7 billion dollars, falling on banks’ internal legal and compliance departments to get up to code.
For inside counsel, the Volcker Rule implicates internal changes for the investments their companies make. Although much of this work will fall to transactional lawyers in the first instance, the work for litigators could be right around the corner. The Volcker Rule not only requires a closer monitoring of deals and investments, but also will find its finer machinations played out for years in courts around the country.
Whether the Volcker Rule takes effect as written remains an open question. Last week, Ben Bernanke confirmed that it won’t meet its July 21 implementation date. But if the chorus of critics across the financial industry get their way, the rule could be postponed permanently. It’s far too early to count on that, but for inside counsel it’s an issue worth monitoring.