The long-in-the-making Volcker Rule was finalized this week. Under the rule, banks and affiliated entities, will not be permitted to engage in proprietary trading and their relationships with hedge funds and private equity funds will be limited. The rule--a five-agency, nearly thousand-page effort--is a reflection of the difficulty of distinguishing prohibited from permissible activity. Volcker compliance programs will be large and complex, and frequent unintentional missteps across Volcker's hazy lines are likely. Consequently, the rule promises to be a plentiful supplier of cases for regulators and a great source of enforcement risk to the companies subject to it.
The statute's "anti-evasion" provision allows the appropriate Volcker agency to "order, after due notice and opportunity for hearing," a firm to terminate offending activities. The statute clarifies that it does not preclude agencies from using their "inherent authority . . . to further restrict any investments or activities under otherwise applicable provisions of law." The preamble to the final rule heightens the stakes by warning banking entities and their officers and directors that they may face civil and criminal sanctions available under other laws--including hefty fines and up to thirty years in prison--for violating the Volcker Rule. Rather than providing clarity about how the agencies will share their Volcker jurisdiction, the regulators promise only that agencies with overlapping jurisdiction will "coordinate . . . to the extent possible and practicable."
Like the rest of the Volcker Rule, how it will be enforced is unclear. The statute called for "consistent application and implementation" of the rule, but the regulators did not lay the necessary groundwork in the final rule. Commissioner Scott O'Malia of the Commodity Futures Trading Commission, in dissenting from the rule, asked that the inter-agency jurisdictional lines be clarified, but also questioned the CFTC's ability to use its substantial powers under the Commodity Exchange Act to enforce the Volcker Rule. The rule was adopted under Bank Holding Company Act and contains its own enforcement provision (described above). Mr. O'Malia points out that even enforcement under the Bank Holding Company Act's provision may be problematic because the final rule did not include a notice and hearing process as required by the statute.
It has been a struggle for regulators to bring the Volcker Rule into being, and it will be a struggle for banking entities to manage the risk of noncompliance as regulators can be expected to compete with one another to bring the first (and later the biggest) case for Volcker violations. The Volcker Rule may become the next Foreign Corrupt Practices Act: generating a lot of big-headline cases with large penalties based on technical violations of compliance and reporting rules.