Federal regulators voted Tuesday to approve a rule that strikes at the heart of Wall Street risk-taking, a moment that punctuates three years of internal squabbling and bank lobbying over an effort to reshape the financial landscape.
The so-called Volcker Rule, a centerpiece of the Dodd-Frank financial overhaul law and a symbol of the Obama administration's efforts to rein in risk-taking after the financial crisis, received approval from all five regulatory agencies writing the rule: the Federal Reserve, the Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Comptroller of the Currency.
The votes on the rule represent a turning point in financial reform. Although it is only one of 400 rules under Dodd-Frank — and nearly two-thirds of the regulations remain unfinished — the Volcker Rule became synonymous with the law itself. And with regulators easing other rules under Dodd-Frank, the Volcker Rule became a barometer for the overall strength of the law.
In some crucial areas, regulators adopted a harder line than Wall Street had hoped. Under the rule, which bars banks from trading for their own gain and limits their ability to invest in hedge funds, the regulation includes new wording aimed at the sort of risk-taking responsible for a $6 billion trading loss at JPMorgan Chase last year. The rule also requires banks to shape compensation packages so that they do not reward “prohibited proprietary trading.”
In addition, it requires chief executives to attest to regulators every year that the bank “has in place processes to establish, maintain, enforce, review, test and modify the compliance program,” a provision that did not appear in an October 2011 draft of the rule.
But the rule, which aims to draw a line between everyday banking and risky Wall Street activities, has its limits. For example, the regulation leaves it largely up to the banks to monitor their own trading. Some critics of Wall Street also wanted chief executives to attest that their bank was actually in compliance with the rule, not just that it was taking steps to comply.
And in another concession to Wall Street, regulators will delay the effective date of the rule to July 2015. Until then, bank lawyers are expected to scour the rule for loopholes and to consider bringing lawsuits against the regulators.
The votes, which come more than a year after Congress required the agencies to finalize the Volcker Rule, offer the financial industry some long-sought clarity. Until recent days, regulators appeared unlikely to meet the recommendation of Treasury Secretary Jacob Lew, who urged the agencies to complete the rule this year.
Ben Bernanke, the Fed chairman, nodded to the delay, noting that “getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments.”
Wall Street expressed displeasure with the rule. In a statement, the Chamber of Commerce said it was “disappointed that regulators may have sacrificed an effective process that could have avoided adverse consequences for Main Street businesses.”
But some lawyers predict a smooth transition. Already, most big banks have complied with large swaths of the rule, shutting down stand-alone proprietary trading desks. The banks are now planning to throw resources at new compliance manuals and training their traders to comply with the rule.
The rule traces to Paul A. Volcker, a former Fed chairman and adviser to President Barack Obama, who championed a ban on banks trading for their own gain, a lucrative yet risky practice known as proprietary trading. Such a prohibition, Volcker argued, would curb risk-taking and avert future bailouts of Wall Street.