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WILMARTH 4/1/2011 1:11 PM 1028 OREGON LAW REVIEW [Vol. 89, 951 Nevertheless, large financial institutions continued their campaign of “lobbying vigorously to weaken the Volcker rule” during the conference committee’s deliberations on the final terms of Dodd- Frank. 328 House and Senate Democratic leaders agreed (with the Obama Administration’s concurrence) on a last-minute compromise that significantly weakened the Volcker Rule and “disappointed” Mr. Volcker. 329 The compromise inserted exemptions in the Volcker Rule that allow banks and BHCs (1) to invest up to three percent of their Tier 1 capital in hedge funds or private equity funds (as long as a bank’s investments do not exceed three percent of the total ownership interests in any single fund), (2) to purchase and sell government securities, (3) to engage in “risk-mitigating hedging activities,” (4) to make investments through insurance company affiliates, and (5) to make small business investment company investments. 330 The compromise also delayed the Volcker Rule’s effective date so that banks and BHCs will have (1) up to seven years after Dodd-Frank’s enactment date to bring most of their equity-investing and proprietary-trading activities into compliance with the Volcker Rule and (2) up to twelve years to bring “illiquid” investments that were already in existence on May 1, 2010, into compliance with the Rule. 331 Probably the most troublesome aspect of the final Volcker Rule is that the Rule attempts to distinguish between prohibited “proprietary trading” and permissible “market making.” The rule defines /goldman-sachs-e-mails-spur-democrats-to-push-wall-street-rules.html; Stacy Kaper, Goldman Suit, Wamu Mess Rev Reg Reform,AM.BANKER, Apr. 19, 2010, at 1. 328 John Cassidy, The Volcker Rule: Obama’s Economic Adviser and His Battles over the Financial-Reform Bill, NEW YORKER (July 26, 2010), http://www.newyorker.com /reporting/2010/07/26/100726fa_fact_cassidy; see also Yalman Onaran, Volcker Rule Attacked as Lawmakers Seek Fund Loophole, BLOOMBERG (June 23, 2010), http://www .bloomberg.com/news/2010-06-23/volcker-rule-under-attack-as-lawmakers-seek-hedge -fund-loophole.html; Eric Dash & Nelson D. Schwartz, In a Final Push, Banking Lobbyists Make a Run at Reform Measures, N.Y. TIMES, June 21, 2010, at B1. 329 Cassidy, supra note 328. After reviewing the final terms of the Volcker Rule, Mr. Volcker remarked, “I’m a little pained that it doesn’t have the purity I was searching for.” Id. 330 Id.; Christine Harper & Bradley Keoun, Financial Reform: The New Rules Won’t Stop the Next Crisis, BLOOMBERG BUSINESSWEEK, July 6–11, 2010, at 42, 43; Stacy Kaper & Cheyenne Hopkins, Key Issues Unresolved as Reform Finishes Up: Fate of derivatives, Volcker Rule Still in Limbo in Final Hours, AM.BANKER, June 25, 2010, at 1; see also Dodd-Frank Act § 619 (enacting §§ 13(d)(1)(A), (B), (C), (E), (F), (G), & (d)(4) of the BHC Act). 331 Harper & Keoun, supra note 330; see also new § 13(d) of the BHC Act, added by Dodd-Frank Act § 619.
WILMARTH 4/1/2011 1:11 PM 2011] The Dodd-Frank Act 1029 “proprietary trading” as “engaging as a principal for the trading account of the banking entity,” while “market making” is defined as “[t]he purchase, sale, acquisition, or disposition of securities and other instruments . . . on behalf of customers.” 332 Distinguishing between proprietary trading and market making is notoriously difficult, 333 and analysts expect large Wall Street banks to seek to evade the Volcker Rule by shifting their trading operations into so-called “client-related businesses.” 334 Moreover, the parameters of “proprietary trading,” “market making” and other ambiguous terms in the Volcker Rule— including the exemption for “[r]isk-mitigating hedging activities” 335 —are yet to be determined. Those terms will be defined in regulations to be issued jointly by the federal banking regulators, the CFTC, and the SEC after those agencies review recommendations contained in a forthcoming FSOC study. 336 Mr. Volcker has urged the FSOC to recommend “[c]lear and concise definitions [and] firmly worded prohibitions” to carry out “the basic intent” of section 619. 337 However, LCFIs have already deployed their considerable political influence to weaken the Volcker Rule, and newly-elected Republican House leaders have declared their intention to exercise “aggressive oversight” with respect to the Rule’s implementation by federal regulators. 338 Given the Volcker 332 Dodd-Frank Act § 619 (enacting new § 13(d)(1)(D) & (h)(4) of the BHC Act). 333 See CARNELL ET AL., supra note 118, at 130, 528–29 (describing the roles of “dealers” (i.e., proprietary traders) and “market makers” and indicating that the two roles frequently overlap). 334 Nelson D. Schwartz & Eric Dash, Despite Reform, Banks Have Room for Risky Deals, N.Y. TIMES, Aug. 26, 2010, at A1; see also Michael Lewis, Proprietary Trading Under Cover, BLOOMBERG (Oct. 27, 2010), http://www.bloomberg.com/news/2010-10 -27/wall-street-proprietary-trading-under-cover-commentary-by-michael-lewis.html; Jia Lynn Yang, Major Banks Gird for “Volcker rule,” WASH.POST, Aug. 14, 2010, at A08. 335 Dodd-Frank Act § 619 (adding new § 13(d)(1)(C) of the BHC Act); see also Dash & Schwartz, supra note 328 (“[T]raders [on Wall Street] say it will be tricky for regulators to define what constitutes a proprietary trade as opposed to a reasonable hedge against looming risks. Therefore, banks might still be able to make big bets by simply classifying them differently.”). 336 Id. (adding new § 13(b) of the BHC Act). 337 Cheyenne Hopkins, Volcker Wants a Clear, Concise Rule, AM. BANKER, Nov. 3, 2010, at 3. 338 Hopkins, supra note 264; Kaper, supra note 264 (reporting that incoming House Financial Services Committee Chairman Spencer Bachus sent a letter to FSOC opposing any “rigid interpretation” of the Volcker Rule and arguing that regulators should not “unfairly disadvantage U.S. financial firms”); Mattingly, supra note 264 (quoting Representative Bachus’s statement that House Republicans would use “aggressive oversight” to influence the implementation of the Volcker Rule and other provisions of Dodd-Frank). Cf. Cassidy, supra note 328 (quoting the statement of Anthony Dowd, Mr.
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