[ by Howard Haykin ]

Efforts to ban or restrict risk-taking by banks and other financial institutions, through implementation of the Volcker Rule under the Dodd-Frank Reform Act, have proved much more complex and divisive than originally anticipated.  It’s been more than 2-1/2 years since the law was enacted, and the earliest date that a final version of the rule can come out, is in late 2012. 

But a 2014 launch is more likely.  While banks already know the broad outlines of the rule, and have made changes to their proprietary trading desks and other areas of the firm, they won't know all the specifics until the regulators approve the final version.  As far as compliance goes, that can be an enormous problem.  According to Ken Bentsen, Acting Chief Executive of SIFMA:  "It's hard to build a compliance system around something when you don't know what it's going to require. “

Industry Folk Not The Only Ones Concerned by the Delays.  Some lawmakers are growing increasingly concerned.  Carl Levin (D - MI.), who helped push the rule through Congress, said that as the rule has "languished in regulatory limbo for 2½ years, the big banks' trading activities have continued to grow," putting the economy at risk.

One reason for the delays, ... can be attributed to drawn-out negotiations among a trio of banking regulators - including the Fed and the SEC.  While progress continues to be made, complexities in the rule and contentious discussions among regulators have slowed the pace.   One area that continues to befuddle regulators is distinguishing between a firm's own risky trading – i.e., proprietary trading  -  and the banks’ buying and selling of securities on behalf of clients. 

SEC officials taken a particularly guarded interest in this issue, since the agency directly oversees broker dealers that conduct "market making" activities.  SEC Commissioner Daniel Gallagher, a Republican, spoke on this issue last week, saying "it makes little sense" for the agency "to defer to the banking regulators in this area when for decades [the SEC] has regulated securities market-making in order to facilitate liquidity and promote the efficient allocation of capital."

False Expectations.  For whatever the reason, people involved in the talks announced in late 2012 that they expected to be finished with the rule in the 1^st quarter of 2013.  But disagreements continued to arise, as did conflicts in rule interpretations – which led the same people to push back completion date to the 2^nd quarter of 2013.

Bank Regulators vs. Securities Regulators, Plus SEC Turnover.   Federal Reserve regulators express frustration with SEC regulators and the positions the Agency takes.  The feeling among SEC regulators is mutual - but at least the SEC had Chairman Mary Schapiro around to personally involve herself in resolving conflicts.  Elisse Walter was involved and continues to be involved, but her future is uncertain if and when Mary Jo White is confirmed as permanent SEC Chairman. 

And then, there are the significant differences between the Democratic SEC Commissioners and their Republican counterparts.  All in all, it will end when one or more participants agree to compromise.  Then again, that's not the way Washington, D.C. operates, these days.  Perhaps we'll have to wait for the next House elections - in 2014 - before a final version can be reached.  That, of course, might push the effecctive date of the rule back to 2015.

Don't be surprised if C-I discontinues interim coverage of the Volcker Rule and simply waits to dissect the final rule version.  That would be okay by me. 

For further details, go to:   [ WSJournal Online, 2/27/13 ] .