On December 10, 2013, several federal banking agencies jointly approved a final rule to prohibit and restrict proprietary trading and certain interests in and relationship with hedge funds and private equity funds. This rule implements Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the “Volcker Rule.” The final rule contains some of the most comprehensive information-reporting and recordkeeping requirements ever imposed on banking institutions that engage in securities trading and market making activities.
The new rule is expected to broadly impact the cost of hedging for all businesses as a result of increased compliance requirements for banks. Those provisions will likely require significant changes to the information technology infrastructure, data processes, and recordkeeping procedures of covered institutions. Internal policies will have to be developed to document, describe, and track the trading and investment fund activities; internal controls will be needed to detect possible areas of noncompliance; and records will have to be maintained to demonstrate compliance and to be submitted to regulators upon request.
"The exceptionally elusive task of defining, disentangling and dissecting permissible from prohibited activities surely posed a monumental challenge for regulators, but that challenge will be revisited tenfold upon bank customers and on the bankers who must comply with this enormous, highly complex and burdensome rule," said American Bankers Association (ABA) President and CEO Frank Keating.
On December 23, 2013, the ABA, along with several community banks, filed the first of what is expected to be a number of legal challenges to the Volcker Rule. It filed a petition in the U.S. Court of Appeals for the District of Columbia Circuit for review of the provision that restricts bank ownership of certain investments.
The reporting of quantitative measurements imposed by the new rule will begin June 30, 2014, for banking entities with $50 billion or more in consolidated trading assets and liabilities. Banking entities with consolidated trading assets and liabilities between $25 billion and $50 billion will be subject to this requirement on April 30, 2016. Entitles with between $10 billion and $25 billion in consolidated trading assets and liabilities will become subject to the requirement on Dec. 31, 2016. To read a description of the final rule implementing the Volcker Rule, please click HERE.