The Volcker Rule1 is designed to prohibit banks and bank affiliates from engaging in two types of behavior that are thought to expose them to inappropriate levels of risk: proprietary trading and the ownership of interests in high-risk investment funds. Restrictions on incentive compensation are a small but critical part of the edifice of compliance rules and exceptions surrounding both of these general prohibitions. The idea is to ensure that employees of “banking entities” (as defined in the rule)2 are not improperly incentivized through compensation arrangements to implement high-risk investment strategies for their organizations.
Over the course of the next year, banking entities must review their operations and determine how to comply with the complex set of requirements contained in the Volcker Rule, promulgated by five federal agencies in December 2013 and accompanied by over 200 pages of attached commentary, explaining the rule and decisions made in the rule-making process.3 As part of the required compliance process, banking entities will need to identify the employees covered by the restrictions, review their existing incentive compensation arrangements and determine what changes need to be made before the revised July 21, 2015 implementation date of the Volcker Rule.4
