Federal financial agencies are taking steps to reevaluate the Volcker Rule as part of the Trump Administration’s review of financial regulations.  In a May 8, 2017 meeting of the Financial Stability Oversight Council, Treasury Secretary Steve Mnuchin reportedly directed the five agencies responsible for the Volcker Rule – the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency (“OCC”), Federal Deposit Insurance Corporation (“FDIC”), Securities and Exchange Commission (“SEC”), and Commodity Futures Trading Commission (“CFTC”) – to reassess the rule.  The official readout of the meeting states that the Council “discussed efforts to assess the efficacy of the Volcker Rule.”

Secretary Mnuchin’s statements during his Senate confirmation hearings suggest that reform of the Volcker Rule could include focusing the rule on the activities of insured depository institutions rather than their affiliates, and revising the definition of proprietary trading to remove uncertainty about the line between prohibited proprietary trading and permissible market making.

Because the Volcker Rule is, by statute, an interagency rule, any amendments to the rule would likely require agreement from all five agencies.  The current prospects for each agency’s willingness to revisit the rule vary:

• Federal Reserve: President Trump has not yet nominated a governor to serve as the Vice Chair for Supervision, the position on the Board of Governors that involves leading the agency’s approach to regulation.  With the departure of Governor Daniel Tarullo, Governor Jerome Powell has informally assumed the duties of the position until it is filled.  In January 2017 Congressional testimony, Governor Powell stated that the Volcker Rule has discouraged banks from market making, noted that the rule causes a “tremendous expense and burden,” and called for Congress to reevaluate the rule. At the same time, in a Congressional oversight hearing in February 2017, Chair Janet Yellen stated that evidence regarding the rule’s impact on corporate bond liquidity is “conflicting,” notwithstanding a December 2016 Federal Reserve staff paper that concluded the Volcker Rule has a “deleterious effect on corporate bond liquidity and dealers subject to the Rule become less willing to provide liquidity during stress times.”

• OCC: In an interview with the Wall Street Journal, Acting Comptroller Keith Noreika said that regulators needed to clarify what types of trading activities are permitted under the Volcker Rule, potentially by cataloging specific types of exempt transactions or investments.  Noreika also suggested that the OCC could unilaterally issue interpretive guidance reinterpreting what types of transactions by national banks constitute proprietary trading.

• FDIC: With the exception of Acting Comptroller Noreika, who serves on the board of the FDIC, current board members have not been openly critical of the Volcker Rule, and may be less willing to support reform than the heads of other agencies.  President Trump has not announced any nominations to fill the open FDIC board member seat.  Moreover, until at least one board member appointed by President Obama has his term expire, is removed from office, or resigns, President Trump’s appointees will not comprise a majority of the board.  We discussed the composition of the FDIC board in a prior post.

• SEC: New Chairman Jay Clayton has not publicly taken a position on the Volcker Rule, but Commissioner Michael S. Piwowar has long been critical of the rule.

• CFTC: Acting Chairman J. Christopher Giancarlo, whom President Trump has nominated to serve as permanent Chairman of the agency, has been critical of the Volcker Rule’s adverse impact on market liquidity, and so is likely to support reform.

Even once President Trump’s appointees are in place at each agency, amendments to the Volcker Rule could take months or longer to complete, given the involvement of five different agencies that, at times, have conflicting priorities.  The rulemaking process to implement the current Volcker Rule was notoriously difficult to complete.