The Volcker Rule: An Overview & Insight

Posted on 01-13-2014 by
Tags: Real Law

Brought to you by the Real Law Editorial Team

Negative visualization is a fundamental tenet of Stoic philosophy. It refers to the practice of imagining bad things that can happen to prepare for the possibility that they might actually unfold.

For many bankers and their legal advisors, waiting for a final Volcker Rule stemming from the Dodd-Frank financial reforms of 2010 provided ample opportunity—even unwittingly—to follow that operative characteristic of Stoicism.

Even now that the rule is finally here (sort of), after federal regulators adopted the set of sweeping changes in December 2013, important questions remain unanswered, leaving plenty of room to contemplate what lies ahead.

Will the rule work? Will it survive inevitable legal challenges? Who benefits most from the new provisions, which are intended to rein in the kind of excessive banking practices that are linked to the financial crisis of 2008?

Bracing oneself by contemplating and preparing for various possible outcomes would certainly seem to be wise counsel at this point.

Reaction to the Rule

Already, despite ferocious lobbying by the banking sector, the final rule is tougher than many expected. But with a government eager to prevent a repeat of 2008, as well as the kind of risky speculative trading that resulted in JPMorgan’s $6 billion “London Whale” loss in 2012, for example, those affected by the rule acknowledge that it could have been much, much worse.

Wall Street in particular heaved a collective sigh of relief that the five federal agencies behind the Volcker Rule crafted an expected prohibition against proprietary trading in such a way that leaves important market-making operations intact.

Also, while the effective date for the rules remains April 1, 2014, banks got more than an additional year to conform. The deadline was pushed to July 2015—and even that could be extended. Either way, the important date is when bank directors will be required to review, and chief executives to personally attest to, the implementation of compliance programs.

That, too, includes a measure of relief. The New York Times reported that some Wall Street critics wanted bank CEOs to bear personal responsibility for actual compliance.

Preparing for a Challenge

Indeed, for all its lauded toughness, Forbes observed that the final Volcker Rule is “so riddled with exceptions, contradictions, and foggy language” that its foremost celebrants will be the Wall Street lawyers who got “the Christmas gift of their dreams.”

Even before the regulators adopted the rule, lawyers were looking for weak spots while preparing for possible litigation.

That could be helped by dissent within the federal agencies that drafted and signed off on the rule. Reuters reported that a member of one of those agencies, the Commodity Futures Trading Commission, has complained that he had only a few weeks to review the lengthy document, which he said “flouted proper rulemaking.”

At the same time, an SEC commissioner accused his fellow regulators of pressing ahead with “massive, untested governmental intrusion” with the Volcker Rule.

Those kinds of dissenting remarks could be powerful weapons in any lawsuits. At the very least, they could provide a partial roadmap to a court challenge.

Visualizing Other Outcomes

For its part, The Wall Street Journal suggested it might be instructive to also examine arguments used by attorney Eugene Scalia, a partner in the Washington, D.C., office of Gibson, Dunn & Crutcher LLP.

The son of United States Supreme Court Associate Justice Antonin Scalia has successfully challenged other Dodd-Frank rules, according to the WSJ. “Mr. Scalia’s recipe for success—he’s 5-1, in recent cases—has been to argue that regulators failed to conduct a thorough analysis of the costs and benefits of a given financial regulation. The courts have knocked out several rules after holding, at Mr. Scalia’s insistence, that such analyses were lacking.”

It remains to be seen whether those or other strategies will be employed and, if they are, whether they can successfully challenge the Volcker Rule. But for those who are critical of such financial reform efforts, the alternative—the rules take effect as they stand—is also worth visualizing.

“He robs present ills of their power who has perceived their coming beforehand,” Seneca the Younger—the Roman Stoic philosopher, dramatist and one-time advisor to Emperor Nero—declared in his moral essay De Consolatione ad Marciam (“On Consolation to Marcia”) written around 40 AD.

The Here and Now

In the meantime, lawyers are dealing with practical matters related to the abundance of ambiguities built in to the 900-plus pages of preamble and actual provisions that were released by the federal agencies.

Simon Johnson, a former chief economist of the International Monetary Fund, concludes simply: “The Volcker Rule could be a major contribution to financial stability. Or it could still flop. The devil now is in the details of implementation and compliance.”

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