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What is the Most Important Volcker Rule Issue that Regulators Must Address Next Year?

In the months since the passage of the Dodd-Frank Act, the SEC has seen several proposed rules issued pursuant to the statute founder after legal challenges from business groups.

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) generally prohibits banks from proprietary trading and sponsoring, holding, or acquiring an ownership interest in hedge funds or private equity funds. These prohibitions are contained in a new Section 13 of the Bank Holding Company Act, the Volcker Rule.

Federal financial services agencies, the Board of Governors of the Federal Reserve System (FRB), the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC) were tasked with issuing comparable regulations to implement this prohibition. Four of the five regulators issued an interagency proposal to implement the Volcker Rule. The CFTC has yet to issue its proposal.

Public comments for the proposed regulation were initially due January 13, 2012. However, the agencies extended the deadline by a month to February 13, 2012.

Bloomberg Law ReportsĀ®-Banking & Finance asked leading practitioners to discuss the most important issue that regulators must address regarding the Volcker Rule in 2012.

Michael W. Stocker, Labaton Sucharow LLP

Even if the Volcker Rule successfully navigates bitter inter-agency debates over implementation and intense lobbying efforts by industry interests, its greatest threat may come from a far more surprising source: the courts. In the months since the passage of the Dodd-Frank Act, the SEC has seen several proposed rules issued pursuant to the statute founder after legal challenges from business groups.

By law, the SEC is required to assess the economic costs of new regulations and to ensure that rulemaking is not capricious. While it is relatively simple to calculate the costs imposed by many Dodd-Frank Act reforms, it can be much more difficult to put a precise dollar figure on their benefit to the public.

In a recent decision, Business Roundtable v. S.E.C., the United States Court of Appeals for the District of Columbia struck down the proxy access rule issued by the SEC pursuant to the Dodd Frank Act, reasoning that the SEC had failed to properly quantify the economic benefit of the new rule. The court held that the SEC had failed to supply sufficient "empirical data" illustrating the benefits to investors of a rule that increased their ability to participate in the election of directors.

There has already been some suggestion that the Volcker Rule may be subject to a similar challenge. The CFTC has raised concerns that draft versions of the Volcker Rule implementing regulations failed to provide sufficient analysis of the costs and benefits of new rules.

The stakes are certainly high. According to a September 7, 2011 report issued by the OCC, the Volcker Rule would ultimately result in nearly a billion dollars in capital costs for banks. Only about $50 million, however, would be associated with the cost of implementing the regulations.

While there can be little reasonable dispute about the benefit to the public of rules that discourage the kind of risky speculation that drove the financial crisis, some careful lawyering may be required to help the courts understand this point.