Alert February 14, 2012

CFTC Proposes Volcker Rule Regulations

The CFTC approved a proposed rule implementing Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule,” which generally prohibits any banking entity from engaging in proprietary trading and from sponsoring or acquiring an ownership interest in hedge funds, private equity funds, and commodity pools, subject to several exemptions that permit banking entities to engage in certain underwriting, market-making, and risk mitigating hedging activities.  The CFTC’s proposed rule is substantially similar to the proposed rules issued jointly in October by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the FDIC, and the SEC, which were discussed in the October 20, 2011 Financial Services Alert.  As required by the Dodd-Frank Act, the CFTC and the other applicable regulators consulted and coordinated extensively in preparing their rules to ensure that they are comparable and consistently applied.  The rules issued by the CFTC would only apply to banking entities, including affiliates and subsidiaries, for which the CFTC is the primary regulatory agency, such as CFTC-registered swap dealers, commodity pool operators, and commodity trading advisors.

Chairman Gary Gensler explained that the CFTC did not join the other regulators in proposing the joint rules in October because of “capacity” issues.  He noted that the CFTC was working on a number of regulations and stressed his desire to consider the rules carefully rather than rushing to meet a deadline.  He also added that the departure of Commissioner Dunn and his replacement by Commissioner Wetjen weighed in favor of the later proposal date.

Chairman Gensler also noted that the banking regulators have the lead role in crafting the Volcker Rule regulations, calling the CFTC a “supporting member” of the regulatory group.  Echoing that point, CFTC staff, when asked certain questions about why the proposed rules were drafted as they were, pointed to the need for consistency with the joint rules.

The proposed rule was approved by a party-line vote of 3-2.

Commissioner Jill Sommers explained her dissenting vote by stating that the CFTC had not yet had time to fully consider the implications of the lengthy and complex rule.  She also criticized the timing and process of the vote, arguing, “We are proposing rules that are virtually identical to the other agencies’ proposed rules well after they have been widely criticized and after many have called for those agencies to start over, including Paul Volcker.”

Commissioner Scott O’Malia acknowledged that the CFTC must comply with Dodd-Frank in a responsible way, but called the proposal a “fatally flawed rule.”  Commissioner O’Malia pointed to the possibility of conflicts among regulators and questioned how regulatory consistency can be achieved.  He also argued that the rule fails to provide the CFTC with any specific enforcement ability. 

Chairman Gensler encouraged interested parties to submit comments on the proposed rule, expressing particular interest in suggestions to ease the compliance burden imposed by the rule.  Comments will be due 60 days from the proposed rule’s forthcoming publication in the Federal Register.