By Robert Taylor
Last November, the federal bank regulatory agencies, together with the Securities and Exchange Commission, issued proposed regulations implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That section contains prohibitions and restrictions affecting the ability of banks and other financial companies to engage in proprietary trading. These prohibitions and restrictions of the Dodd-Frank Act commonly are referred to as the “Volcker Rule.”
Because community banks generally are not engaged in propriety trading, they can ignore most of the voluminous and controversial regulations implementing the Volcker Rule. However, the Volcker Rule regulations will require some action by all community banks. Specifically, the proposed regulations require that by July 21, 2012, every bank have in place policies and procedures designed to prevent it from commencing such activities without first establishing a compliance program.
The Volcker Rule restricts proprietary trading by insured depository institutions and their holding companies. “Proprietary trading” is defined as “engaging in the purchase or sale of one or more covered financial positions as principal for the trading account of a bank.” A “covered financial position” includes any position in a security. Therefore, any security investment made by a bank will be considered a covered financial position. These investments are restricted, however, only if the investment is made for a trading account of the bank.
A “trading account” is defined as “any account used for acquiring or taking positions in securities principally for the purpose of selling in the near term or otherwise with the intent to resell in order to profit from short-term price movements.” If a bank’s investment account does not meet the definition of a trading account, investments in that account will not be restricted by the Volcker Rule.
While community banks may have accounts that might fall within the definition of a trading account, these accounts typically invest only in government securities, and the proposed regulations exempt from the proprietary trading restrictions purchases and sales of U.S. government, state and municipal securities.
The proposed regulations require banks that are engaged in proprietary trading to establish detailed compliance programs for monitoring compliance with the Volcker Rule. The proposed regulations further provide that any bank that is not engaged in proprietary trading must still have in place policies and procedures that will prevent the bank from commencing such activities without first developing a compliance program. Accordingly, a community bank that engages in no proprietary trading will still need to adopt policies and procedures to restrict the bank from commencing such activities without first developing a compliance program.
Public comments on the proposed regulations were due by Feb. 13, 2012. While these requirements may change somewhat with the issuance of the final regulations, the Volcker Rule requirements are scheduled to become effective on July 21, 2012. Community banks will need to review the final regulations and make sure they have adopted any necessary policies and procedures by the effective date.
Robert Taylor is a partner at Day Pitney, a Hartford, Conn.-based law firm with offices throughout the Northeast.