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Dissenting Statement Regarding Adoption of Rule Implementing the Volcker Rule

Commissioner Michael S. Piwowar

U.S. Securities and Exchange Commission

Dec. 10, 2013

The Securities and Exchange Commission (“SEC” or “Commission”), the Commodity Futures Trading Commission, the Board of Governors of the Federal Reserve System (“Board”), the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the “Rulemaking Agencies”) today approved a coordinated rule to implement Section 619 of the Dodd‑Frank Wall Street Reform and Consumer Protection Act (“Dodd‑Frank”), commonly referred to as the “Volcker Rule.”  The final rule adopted today is substantially different from the rule that was proposed over two years ago.[1]  In my view, the extent of these changes necessitates a reproposal of the rule and an opportunity for public comment.  Therefore, I am not able to support the adoption of the rule. 


Before discussing the rule, I want to recognize the extraordinary efforts of the SEC’s staff.  Staff across the agency put in many long nights and weekends and were able to aid significantly the other regulators’ understanding of the complex issues related to proprietary trading and the numerous types of, and differences among, entities that rely on the exemptions in Sections 3(c)(1) or 3(c)(7) of the Investment Company Act from registering with the Commission as an investment company.  Despite the efforts of the Commission staff, however, the overall rulemaking process has been flawed and, in the rush to meet an arbitrary deadline set by the Administration, what should be a primary concern of any independent agency when adopting a rule – to know precisely what is in the rule and to understand the potential impacts of the rule – was disregarded.         


The Legal Case for Reproposal


The Rulemaking Agencies have not complied with legal obligations that apply to any rulemaking.  In particular, the proposal of the Volcker Rule that preceded today’s action did not provide sufficient notice to the public of the contents of the rule adopted today.  As the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) has noted concerning what constitutes adequate notice, “[i]t is not consonant with the purpose of a rule‑making proceeding to promulgate rules on the basis of inadequate data, or on data that, to a critical degree, is known only to the agency.”[2]  The Volcker Rule adopted today is not based on data sufficient to meet this standard.     


Furthermore, in determining whether the notice requirement is met, courts have looked to whether the final rule was a “logical outgrowth” of the proposal and comments.  “[W]e apply that standard [logical outgrowth] by asking whether ‘the purposes of notice and comment have been adequately served,’… that is, whether a new round of notice and comment would provide the first opportunity for interested parties to offer comments that could persuade the agency to modify its rule.”[3]  The Volcker Rule adopted today exceeds the bounds of this logical growth standard.


Unless a statute for a particular regulatory program specifies a different standard, the scope of judicial review for rulemaking is governed by Section 706 of the Administrative Procedure Act (“APA”).  Section 706 provides that, among other things, the scope of judicial review includes the authority for a reviewing court to decide whether an agency action is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or whether the action is “without observance of procedure required by law.”[4]  In applying the APA’s arbitrary and capricious standard, the D.C. Circuit has found that an agency must consider the costs imposed by the rule.[5]  The “without observance of procedures required by law” standard requires, among other things, that an agency comply with the procedures mandated by the APA and with an agency’s own procedural regulations governing rulemaking.[6]  The Rulemaking Agencies did not conduct an economic analysis of the rule and have not estimated the costs that will be imposed by the rule.  In addition, one of the Rulemaking Agencies did not even follow its own policy to conduct a regulatory analysis before formally acting on a rule.    


The Administrative Conference of the United States (“ACUS”) was, until 1995, an independent agency acting in an advisory capacity in administrative law and procedure.  In this role, ACUS conducted a study of judicial decisions, primarily of the D.C. Circuit, of rulemaking proceedings remanded to agencies.[7]  Notably, ACUS recommended that agencies consider providing for two cycles of notice and comment for rulemakings where, from the outset, the agency anticipates that the issues will be unusually complex.[8]  The Volcker Rule could not fit more squarely into that mold.  Throughout, the proposing release indicated just how complicated the rule is.[9]     


The Moral Case for Reproposal


According to the Canons of Ethics that have guided the Commission for the past 55 years, rulemaking power accorded to the Commission by Congress imposes the obligation “to adopt rules necessary to effectuate the stated policies of the statute in the interest of all of the people.”[10] “[R]ules should never tend to stifle or discourage legitimate business enterprises or activities, nor should they be interpreted so as unduly and unnecessarily to burden those regulated with onerous obligations.”[11]


In addition, in 2012, the Commission’s Division of Risk, Strategy, and Financial Innovation – now known as the Division of Economic and Risk Analysis (“DERA”) – and the Office of the General Counsel (“OGC”) issued guidance on economic analysis in Commission rulemakings.  The guidance noted that “as SEC chairmen have informed Congress since at least the early 1980s – and as rulemaking releases since that time reflect – the Commission considers potential costs and benefits as a matter of good regulatory practice whenever it adopts rules.”[12]  The guidance provides that each rulemaking include a sound economic analysis with the following elements:  (1) a statement of the need for the proposed action; (2) the definition of a baseline against which to measure the likely economic consequences of the proposed regulation; (3) the identification of alternative regulatory approaches; and (4) an evaluation of the benefits and costs – both quantitative and qualitative – of the proposed action and the main alternatives identified by the analysis.  DERA and OGC also noted that “[h]igh-quality economic analysis is an essential part of SEC rulemaking.  It ensures that decisions to propose and adopt rules are informed by the best available information about a rule’s likely economic consequences, and allows the Commission to meaningfully compare the proposed action with reasonable alternatives, including the alternative of not adopting a rule.”[13]                   


The Board also has a policy for its staff to prepare a regulatory analysis before presenting any proposals regarding a regulation to the Board for formal action.  Pursuant to Board policies, the extent of the regulatory analysis, at a minimum, “will discuss the need for and purposes of the regulation, set forth the various options available, discuss, where appropriate, their possible economic implications, evaluate their compliance, recordkeeping and reporting burdens, and recommend the best course of action based on an evaluation of the alternatives.  If the regulation concerns an area where considerable information is available, a correspondingly more exhaustive regulatory analysis will be expected.”[14]


The Rulemaking Agencies failed both at the proposing and adopting stages to prepare an economic or other regulatory analysis of the Volcker Rule.  As a result, we do not know what the rule’s economic impact will be or whether other alternatives might have accomplished the goals of the rulemaking at a lower cost and with less disruption to the capital markets.  This is simply irresponsible.  I understand that for a rule as complex as Volcker these analyses would be challenging, yet that is not a justification for abdicating our moral – and legal – obligations to do so.  In fact, we should be all the more careful given that the Volcker Rule undoubtedly will have wide‑ranging effects on the economy.        


The Common Sense Case for Reproposal


Common sense, as well as good government, dictates that, at a minimum, an agency knows what is in the rule and have a basic understanding of the potential impact the rule will have.  Unfortunately, the Volcker Rule being adopted today fails to meet both those fundamental principles.  Indeed, if we cannot satisfy ourselves with how the rule will work, the public is unlikely to have such confidence either.     


The rule proposal was more than 500 pages long, asked approximately 1,300 questions, and the Rulemaking Agencies received over 18,000 comment letters.  The common rule text spanned approximately 120 pages.  The length of the common rule text, the volume of questions, and the number of comment letters attest to the importance and complexity of this rulemaking. 


It was only recently that the Rulemaking Agencies decided to fast track the rule and adopt it before the end of the year, with today arbitrarily set as the deadline.  To reinforce just how arbitrary the deadline is, it has already been 1,238 days since the passage of Dodd-Frank and 764 days since the rule proposal was published in the Federal Register.  Yet, despite this lengthy passage of time, we were directed to complete this rulemaking by today.    


With five agencies involved, the drafting process was difficult.  During the recent rush to complete and adopt the rule, I have received, over the past two weeks, multiple iterations of partial drafts of the rule text and adopting release along with the caveat that the interagency staff group was continuing to review and prepare technical and clarifying changes to these documents.  With less than one week until the date of the vote, I still had not received the proposed voting draft of the rule.  The final version was finally provided on December 5, 2013, spanned 932 pages, and, despite my urgings, lacked an economic analysis.  


As the adopting release notes, there are significant changes to the rule from the one proposed.  Given these substantial changes, the short period of time in which to review the rule, the complexity of the issues, and the lack of an economic analysis, it is virtually impossible to understand what precisely is in the rule we voted on today let alone the possible impact it will have. 


The reasonable outcome and the one most consistent with the law, our moral obligations, and common sense would have been to repropose the Volcker Rule.  This would have allowed the public the opportunity to review and submit comments on the myriad changes from the initial proposal.  I understand that a reproposal would have taken additional time and delayed the adoption of a final Volcker Rule.  However, as is true in almost all circumstances, it is better to get it right than to simply get it done.       




[1]  The Volcker Rule proposal was approved before I joined the Commission. 

[2]  Portland Cement Association v. Ruckelshaus, 486 F.2d 375, 393 (D.C. Cir. 1973).

[3]  American Water Works Association v. EPA, 40 F.3d 1266, 1274 (D.C. Cir. 1994) (quoting Fertilizer Institute v. EPA, 935 F.2d 1303, 1311 (D.C. Cir. 1991).

[4]  5 U.S.C. 706.

[5]  Chamber of Commerce of the United States v. SEC, 412 F.3d 133, 144-145 (D.C. Cir. 2005).  I note, however, that in that case, under Section 2(c) of the Investment Company Act of 1940, the SEC was required to consider whether the rule would promote efficiency, competition, and capital formation.  The rule adopted today is not promulgated under the Investment Company Act, and, therefore, not subject to the requirements of Section 2(c).        

[6]  See, e.g., Way of Life Television Network, Inc. v. FCC, 593 F.2d 1356, 1359 (D.C. Cir. 1979).

[7]  ACUS Recommendation No. 76-3, Procedures in Addition to Notice and the Opportunity for Comment in Informal Rulemaking, 41 FR 29654, 29655 (July 19, 1976). 

[8]  Id.

[9]  See Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, SEC Rel. No. 34-65545 (Oct. 12, 2011), 76 FR 68846 (Nov. 7, 2011) at 68849 (“Given these complexities, the Agencies request comment on the potential impact the proposed approach may have on banking entities and the businesses in which they engage.”); at 68869 (“Although the purpose and function of these two activities are markedly different—market making-related activities provide intermediation and liquidity services to customers, while proprietary trading involves the generation of profit through speculative risk-taking—clearly distinguishing these activities may be difficult in practice. …  In order to address these complexities, the Agencies have proposed a multi-faceted approach ….”); at 68874 (“Like market making-related activities, risk-mitigating hedging activities present certain implementation challenges because of the potential that prohibited proprietary trading could be conducted in the context of, or mischaracterized as, a hedging transaction.  This is because it may often be difficult to identify in retrospect whether a banking entity engaged in a particular transaction to manage or eliminate risks arising from related positions, on the one hand, or to profit from price movements related to the hedge position itself, on the other.”); at 68884-68885 (“The types of trading and market making-related activities in which banking entities engage is often highly complex, and any quantitative measurement is capable of producing both ‘false negatives’ and ‘false positives’ that suggest that prohibited proprietary trading is occurring when it is not, or vice versa.”); at 68889 (“In light of the size, scope, complexity, and risk of covered trading activities, do commenters anticipate the need to hire new staff with particular expertise in order to calculate the required quantitative measurements …?) (emphases added).     

[10] 17 CFR § 200.67.

[11] Id.

[12] Current Guidance on Economic Analysis in SEC Rulemakings (Mar. 16, 2012), available at

[13] Id.

[14] See 44 FR 3957, 3958 (Jan. 19, 1979).

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