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Volume XIII, Number 39


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Fed’s Quarles: Volcker Rule Is Not Working Well

In pointed and detailed public remarks, Federal Reserve Board Vice Chairman for Supervision Randal Quarles said on Monday that the Volcker Rule is “an example of a complex regulation that is not working well” and proposed a number of possible changes to the Volcker Rule. Mr. Quarles emphasized that all five regulatory agencies responsible for the implementation of the Volcker Rule are actively working on changes to the Volcker Rule. Overall, the possible changes outlined by Mr. Quarles focus on reducing the burden of the Volcker Rule within the boundaries of the statutory requirements, particularly for financial institutions that do not have large trading operations, as well as limiting unintended extraterritorial effects of the Volcker Rule. Further, it is not clear whether all five regulatory agencies are in alignment with the priorities and solutions that Mr. Quarles outlined in his speech, although he stated that he thought the odds of implementing the changes are “pretty good.”

In his remarks, Mr. Quarles identified the following possible changes or adjustments to the Volcker Rule:

  1. Clear definitions of “proprietary trading” and “covered fund”: Mr. Quarles stated that determining whether a trade or investment falls within the definition of proprietary trading or covered fund is too difficult. He also acknowledged that the regulatory agencies have at times provided inconsistent answers regarding whether a particular activity was covered by the Volcker Rule. Clearer and more transparent definition would, in Mr. Quarles’ view, benefit both financial institutions and the supervisors at the regulatory agencies.
  2. Exempting community banks from the Volcker Rule. Although a full exemption would require a change in the statute itself (something Mr. Quarles supports), he states that the regulatory agencies can mitigate the burden on community banks that generally do not engage in proprietary trading or own or sponsor covered funds. However, he did not provide any specifics on what mitigating actions the regulatory agencies could take without a statutory change.
  3. Market making exemptions. Mr. Quarles advocated for a clearer test for determining whether market making-related activities are designed not to exceed the reasonably expected near-term demands of clients, customers, or counterparties and, therefore, would fall under the statutory exemption.
  4. Foreign funds exemptions. One of the unintended consequences of the Volcker Rule regulations is that a foreign fund that is organized outside the United States and offered only to foreign investors can be subject to the Volcker Rule due to “control” of the fund by a foreign banking organization that is itself subject to the Volcker Rule. There is currently in place an enforcement stay against these foreign funds. Mr. Quarles stated that he supports the continuance of this stay until the regulatory agencies agree upon a solution regarding these unintended consequences.
  5. “Solely Outside the United States” (SOTUS) exemption for trading and covered funds: Mr. Quarles stated that determining whether a foreign bank’s activities can be considered as occurring “solely outside the United States” and, therefore, exempt from the Volcker Rule, is currently overly complicated. He suggested that one possible solution is to focus on the risk of the booking location to determine whether the activity occurs outside of the United States. He cautioned, however, that the regulatory agencies had to look at the statutory language and principles of competitive equality before enacting any changes to the SOTUS.
  6. Compliance burden. Mr. Quarles stated that the regulatory agencies are considering broad revisions to the Volcker Rule compliance requirements in order to simplify compliance, especially for entities that engage in limited activities subject to the Volcker Rule, including foreign banks with limited activities in the United States.


Mr. Quarles’ remarks reflect strong and clear support for changes in the Volcker Rule, and it is helpful to know what specific issues are of concern to the regulatory agencies and possibly subject to revision. Some changes (e.g., reducing the compliance burden) are likely easier to implement than others (e.g., clarifying the definition of proprietary trading and covered fund). There does seem to be an increasingly strong regulatory will to enact changes, at least from the Federal Reserve. Whether there is the same will and enthusiasm at the four other regulatory agencies remains to be seen, although the new Comptroller of the Currency Joseph Otting has signaled support for changes to the Volcker Rule. While we would not be surprised to see some regulatory adjustments to the Volcker Rule enacted later this year, major changes to the Volcker Rule by the regulatory agencies are unlikely in the absence of statutory amendments.

Copyright © 2023 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VIII, Number 68

About this Author

Melissa R.H Hall, Financial services attorney, Morgan Lewis
Of counsel

Melissa R. H. Hall represents US and overseas banks, nonbank financial services companies, investors in financial services, and technology companies in regulatory and corporate matters. She advises them on a wide range of state and federal financial regulatory laws and regulations. She provides counsel on financial regulatory compliance and enforcement, including state and federal licensing requirements, consumer financial products and compliance, payment systems, corporate and transactional matters, financial institution investment and acquisition, and the development...

Charles Horn, financial services attorney, Morgan Lewis

Charles M. Horn is a partner in Morgan Lewis's Investment Management and Securities Industry Practice. Mr. Horn focuses his practice on regulatory and transactional matters, primarily in the areas of banking and financial services. He works on behalf of domestic and global financial institutions of all sizes on regulatory, supervisory, enforcement and compliance matters before all major federal financial institutions regulatory agencies, and leading state financial regulatory agencies.