D-Day for ‘Volcker Rule’

Financial regulators are bracing for an onslaught of litigation and second-guessing as they put the finishing touches on the controversial “Volcker Rule.”

Five different regulators will huddle Tuesday to finish the rule, which has been years in the making and is a central plank of the Dodd-Frank financial reform law. 

The lengthy regulation is aimed at cracking down on risky, profit-seeking trades by banks, and the financial industry has fiercely resisted it.

{mosads}Industry groups are prepared to drag the Volcker Rule into court, while advocates of stronger regulation are vowing to redouble their efforts to pass new limits on Wall Street.

“What we’re going to get tomorrow is a bunch of legal definitions, and then we’re going to have to spend the better part of the next six to 18 months, maybe 24 months, figuring out what those definitions actually mean and how the regulators interpret them,” Brian Gardner, vice president of Washington research at Keefe, Bruyette & Woods, said on Monday.

Finalizing the rule will be a significant achievement for regulators, given the massive challenge it posed. When regulators unveiled their original proposal back in October 2011, it ran roughly 300 pages and posed about 1,300 questions to the public.

Once the rule is issued, observers expect the battle will shift to the courts. 

Financial and business industry groups have filed numerous legal challenges to Dodd-Frank rule-makings and have succeeded in rolling back some of the new regulations.

“They sue over everything,” said Bartlett Naylor, financial policy advocate for Public Citizen. “This actually goes to one of the major sources of profit for the big three or four banks … what’s the downside from not doing it?”

While a legal challenge is widely anticipated, industry groups thus far are keeping their cards close to the vest. Many on K Street are waiting to “see what the final rule really looks like before determining likelihood of litigation,” according to those familiar with the issues.

Lisa Burgess, a spokeswoman for the U.S. Chamber of Commerce, said Monday it was too soon to say whether the nation’s largest business lobby would sue regulators over the trading limits.

“We are deeply concerned about the rule-making process with the Volcker Rule, but will have to examine the final rule in order to determine the best path forward,” she said.

Many expect the final text of the Volcker Rule — which has yet to be released — will be significantly strengthened from what was first proposed. 

But reform advocates fear intense industry pressure would lead to softer rules, and they plan to go through the regulation with a fine-tooth comb to see whether it misses their mark.

“The strength of the Volcker Rule will determine the zeal through which we pursue reform,” said Naylor. “If the regulators … have succumbed once again to industry appeals, then I guess Congress will have to be that much more precise in telling banks what they can and cannot do.”

Criticizing Wall Street has become a populist calling card for lawmakers in both parties. 

A bipartisan group of senators, headlined by Sen. Elizabeth Warren (D-Mass.), has introduced legislation to reinstate the Glass-Steagall Act. 

That law, largely repealed in the 1990s, established a firewall between commercial and investment banking, and some have called for its return in the wake of the financial crisis.

Meanwhile, Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have formed an unusual pairing to push a bill that would subject big banks to further capital restrictions.

Their efforts have attracted attention, but many are skeptical that enough lawmakers are willing to revisit the financial reform debate yet again.

“The [Volcker] Rule will be pretty tough and Congress is not going to want to wade right back into this part of Dodd-Frank,” said a Democratic financial industry lobbyist. “Some on the far left and far right will always press for a return to Glass-Steagall, but they are not going to comprise a majority in any chamber.”

And while both sides digest the new rules and position themselves, Wall Street will have plenty of time to come into compliance with the new rules. 

The regulations do not take effect until July 2014, and regulators have the discretion to delay compliance by a full year three separate times. 

The Federal Reserve is reportedly looking at delaying the effective date until 2015 already, meaning the fight will continue well after the ink on the rules are dry.

“We’ve got many more steps to take,” Naylor said.

Megan Wilson contributed.