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Financial Services Law Insights and Observations

Federal Reserve joins other regulators in approving final revisions to Volcker Rule

Agency Rule-Making & Guidance Volcker Rule Federal Reserve Of Interest to Non-US Persons Bank Holding Company Act

Agency Rule-Making & Guidance

On October 8, the Federal Reserve Board announced that all five federal financial regulators have signed off on final revisions to the Volker Rule (the Rule) to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the other four regulators approved the revisions last month. The revisions, which take full effect on January 1, 2021, clarify prohibited activities and simplify compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The Fed noted that community banks are generally exempt from the Rule by statute, and stressed that the “revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law,” and that the regulators “expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies’ 2013 rule.” However, Federal Reserve Governor Lael Brainard issued a dissenting statement, stressing that the revised Rule “weakens the core protections against speculative trading within the banking federal safety net,” and that the elimination without replacement of the “‘short-term intent’ test for firms engaged in higher levels of trading activities… materially narrows the scope of covered activities.” Brainard also expressed concern about “examiners’ ability to assess compliance with the final rule because it relies on firms’ internal self-policing to set limits to distinguish permissible market making from illegal proprietary trading, no longer requires firms to promptly report limit breaches and increases, and narrows the scope of the CEO attestation requirement.”