Waiting for Volcker

Catherine Dunn

Corporate Counsel

2012-07-01 00:00:00.0

When Jamie Dimon, JPMorgan Chase & Co.'s CEO, confirmed in May that his bank had suffered more than $2 billion in trading losses, the flood of commentary quickly tapped into one of the most controversial components of the Dodd-Frank financial reform law: the so-called Volcker Rule. Named for former Federal Reserve Chairman Paul Volcker, who proposed it, that section of the law is intended to place prohibitions on proprietary trading and other risky bets at federally insured banks.

Dimon is a leading opponent of the rule, and no sooner did he issue a mea culpa than he lamented his bank's "egregious mistake" because, in addition to everything else, it would give ammunition to regulators. Meanwhile, proponents of the rule have said the bank's blunder highlights the need to restrict high-stakes trading with government-backed dollars.

Yet, as the rule's statutory deadline approaches the two-year anniversary of Dodd-Frank, there is still no final Volcker Rule. And how this fracas will affect the content of the rule—and even when it will come out—is still anyone's guess.

As Oliver Ireland, former associate general counsel of the Federal Reserve System's Board of Governors, puts it, "The world keeps changing." If the writing of the Volcker Rule was on one schedule before the JPMorgan episode, now "it's probably on a slightly different schedule," says Ireland, a partner in the Washington, D.C., office of Morrison & Foerster.

The rule's schedule has been in doubt for months. Under Dodd-Frank, it's supposed to take effect on July 21, 2012. But in February, after a proposed version of the rule generated thousands of conflicting public comments, Federal Reserve Chairman Ben Bernanke said the rule would likely not be ready by July. In April the Fed and other agencies issued a joint statement in an attempt to clarify that, in any case, financial institutions would have until July 2014 to come into conformance with the rule.

That statement still didn't quell questions from industry. Says William Stern, a partner at Goodwin Procter in New York: "Without having a definitive rule, there's still a lot of doubt in terms of what activities are going to be permitted and what activities aren't."

A major part of the challenge is that it's an interagency rule. It comes under the province of five different regulatory agencies: the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (which will produce its own version of the rule).

"I've written interagency rules. It's awful," says Ireland, who worked on the Gramm-Leach-Bliley privacy rules under the Financial Services Modernization Act of 1999. He recalls some 40 people sitting in a room, poring over a draft, trying to work out disagreements among agencies on substantive issues, as well as on the language. "You've got to resolve all of those differences, get to a common agreement, and get it out. You have to make a lot of deals," Ireland notes.

And while the staffs of the regulatory agencies are sifting through the mountain of public comments they received on the proposed rule, they're also absorbing the furor sparked by the JPMorgan wager, Ireland says: "They're listening to everything. They are absolutely listening to the dialogue that's going on right now."

Congress tends to be particularly vocal, even after legislation has been passed on to regulators to implement. It's also election season, and President Barack Obama is pushing for tighter financial reform, while Republican presidential candidate Mitt Romney has said he will seek to repeal Dodd-Frank. So in today's sharply partisan capital, the result is that regulators are on the receiving end of a lot of mixed messages, says Roberta Karmel, a former SEC commissioner and a former public director of the New York Stock Exchange.

"The Democrats say one thing and the Republicans say another, and the Democrats are in control of the Senate and Republicans are in control of the House," observes Karmel, now a Brooklyn Law School professor. "So they are giving contradictory instructions to the agencies. That makes it very difficult for the agencies to operate."

Regulators also know that their decisions will face scrutiny. Congress routinely calls on SEC commissioners to testify in public hearings, for example. The U.S. Court of Appeals for the D.C. Circuit also has vacated three financial regulations in recent years, upholding a challenge last summer, for instance, to the SEC's cost-benefit analysis of its own rule-making. David Becker, former GC of the SEC, and now a partner at Cleary Gottlieb Steen & Hamilton in Washington, D.C., says, "Rules as complicated and as far reaching as some of the rules that we're seeing in the Dodd-Frank context are going to be litigated in the Court of Appeals. So you try to make as good a record of being thoughtful and reasonable as you possibly can."

Until the regulatory agencies decide what's in and what's out, the big banks, including JPMorgan Chase, will be unable to prepare to conform. "You don't know what you're going to have to do," says Ireland, "and you don't know when you're going to have to do it. It's as simple as that."