Public Statements & Remarks

Statement of Dissent by Commissioner Scott D. O’Malia on the Volcker Rule

December 10, 2013

I respectfully dissent from today’s Commission vote on the final rule implementing § 619 of the Dodd-Frank Act,1 commonly known as the “Volcker Rule.” I cannot support a rulemaking that undermines the regulatory process, nor clearly delineates the Commission’s new jurisdiction and enforcement authority under § 13 of the Bank Holding Company Act of 1956 (“BHC Act”)2 and fails to include procedures that afford due process to market participants.

Former Supreme Court Justice Louis D. Brandeis, who earlier in his career was instrumental in establishing the Federal Reserve System, stated: “If we desire respect for the law, we must first make the law respectable.” But respect—and integrity of process—is what has been most lacking in the Commission’s approach to rulemaking.

I believe the Commission must get back to the basics of good government and proper rulemaking. I cannot vote for a final rule that is hardly the product of meaningful consideration by the full Commission, but instead was negotiated exclusively by the Chairman. In addition, I cannot vote for a final rule where the Commission has not devoted enough attention to providing sufficient clarity and due process in the enforcement of new and untested regulatory authority, but still imposes significant obligations upon market participants at an unknown—but surely considerable—cost.

Abuse of Process

Throughout the Commission’s rulemakings under the Dodd-Frank Act, I have urged the Commission to act faithfully in accordance with the applicable statutory authorities and the Administrative Procedure Act (“APA”).3 However, in the implementation of one of the most important mandates issued by Congress in response to the financial crisis, the Commission seems to have forgotten the basics of agency rulemaking. I am deeply troubled by the egregious abuse of process in this rulemaking. Without a doubt, it far surpasses all other previous transgressions to date.

The first opportunity each Commissioner had to review a partial draft of the nearly 1,000-page final rule came only three weeks prior to today’s vote. Further, because the Commission was operating in an information vacuum, the fact that the Commissioners were not reviewing the working interagency draft—but instead had the “CFTC-preferred” version of the rule—only came to light a few days later.4 The Commission did not receive a near-final draft of the rule (with language agreed to by all five agencies) until just six days prior to the vote, despite repeated requests by Commissioners for a version of the draft then in circulation amongst the responsible agencies. This six-day draft was not even accompanied by the courtesy of a summary or term sheet in order to aid the Commission in digesting, at the last minute, this incredibly complex and dense final rule.

I am disappointed that today’s vote on the final rule is besmirched by the purposeful circumvention of measured review by each Commissioner’s office. It is simply not possible to carefully weigh a final rule—particularly one with as much detail and consequence as the Volcker Rule—in the briefest of timeframes. Accordingly, I am concerned that the lack of meaningful participation by the full Commission in the rulemaking process has therefore seriously impaired the ability of the Commission, as a deliberative body, to engage in reasoned decision-making.

Congress established the CFTC as an independent agency led by a Commission—not a director—to act as steward to the futures and swaps markets. In doing so, Congress entrusted each of the Commissioners to independently use his or her experience and expertise to carefully review and deliberate upon all Commission action, including rulemaking. Final rules should reflect the input and collective opinion of the Commission as a whole, but today’s vote falls far short of that fundamental standard.

It is imperative that the Commission respect the letter and spirit of the law and adhere faithfully to APA requirements in our implementation of this new statutory authority granted by Congress under the BHC Act. Unfortunately, the Commission’s rulemaking over the past three years has been aptly referred to as “regulation by fiat.”5 We cannot continue down this path of reflexive, knee-jerk regulation that fails to provide clarity and certainty to market participants. The Commission must get back to the basics and return to a thoughtful, measured approach to regulating our markets in an open and transparent manner.

Jurisdiction and Enforcement Authority

I also believe that the basics of any rulemaking are jurisdiction and enforcement. However, the final rule fails to provide clear and consistent procedures for both (1) the Commission’s new enforcement authority under § 13 of the BHC Act and (2) due process for market participants.

As a threshold matter, the Volcker Rule may give us concurrent, and potentially overlapping, jurisdiction as the “primary financial regulatory agency”6 of a Commission registrant or registered entity, so long as there is some type of corporate relationship with a banking entity. It is essential that the Commission continue to work with the other responsible agencies on implementation to further outline the scope of each agency’s jurisdiction, maximize regulatory efficiency, and provide consistency for market participants, with a minimum of duplicative and costly requirements and wasted resources.7 The Commission must also be mindful of foreign regulators and seek harmonization in the extraterritorial application of our jurisdiction, in accordance with principles of international comity.

I am concerned that the Commission has not devoted enough attention to delineating our enforcement authority and procedures under the Volcker Rule, including the implications of not promulgating the final rule under the Commodity Exchange Act (“CEA”).8 This is important because the final rule is only being promulgated under the BHC Act. Consequently, the Commission is limited to only the enforcement measures provided for by § 13(e)(2) of the BHC Act. By not also promulgating the final rule under the CEA, the Commission cannot use its full suite of enforcement tools under the CEA to ensure compliance with the Volcker Rule.

If the Commission wanted to use its enforcement powers under the CEA, the final rule must be promulgated under the CEA and undergo cost-benefit consideration pursuant to § 15(a) of the CEA.9 But, by choosing to forgo any cost-benefit analysis and promulgate the Volcker Rule solely under the BHC Act, the Commission has thus limited its enforcement powers.

To illustrate this point, it is critical to emphasize that the Commission’s authority under the Volcker Rule is not derived from the CEA, which established the CFTC and its jurisdiction over the futures and swaps market. Section 619 of the Dodd-Frank Act amends the BHC Act, which is administered by the Federal Reserve Board. The Volcker Rule is codified as § 13 of the BHC Act and confers limited enforcement authority to the Commission under § 13(e)(2) to order an affected party to “terminate the [violative] activity” and “dispose of the investment.”10

First, although the statutory text of § 13(e)(2) suggests that the Commission may, essentially, issue a cease and desist order to a banking entity engaging in violative activity, the Commission has not promulgated any provisions in the final rule that would define and delineate such an order.

The issue of enforcement action is not a problem for the banking agencies, who have broad supervisory powers over the safety and soundness of banking entities, and considerable enforcement powers under § 8 of the BHC Act, or §§ 8 or 39 of the Federal Deposit Insurance Act11 (as described in the preamble to the final rule). Those powers are conferred to the banking agencies as prudential regulators. The Commission, however, is not a prudential regulator of its registrants or registered entities and does not have the same powers as the banking agencies.

Second, I have serious concerns that by not including specific procedures in the final rule for an enforcement action taken by the Commission pursuant to § 13(e)(2), the Commission is not affording due process to any party that might be the subject of a future enforcement action. The statutory text in § 13(e)(2) explicitly states that “due notice and opportunity for hearing” must be provided. But, the final rule does not contain any procedures for notice or hearing, and in fact does not even mention that statutory requirement.

Third, I am also concerned that the Commission may nevertheless try to read its enforcement powers under the CEA into its limited enforcement authority under the BHC Act. The final rule, in new § 75.21(b), states that “the Commission may take any action permitted by law to enforce compliance with section 13 of the BHC Act and this part, including directing the banking entity to restrict, limit, or terminate any or all activities under this part and dispose of any investment.”

That provision, without being promulgated under the CEA and undergoing cost-benefit consideration, cannot permit the use of enforcement powers provided for in the CEA. The enforcement powers the Commission has under the CEA explicitly only apply to violations of “this Act” (the CEA), including “any rule, regulation, or order of the Commission promulgated in accordance with . . . this Act” (emphasis added).12

Although it would be possible for the Commission to exercise its power over registration of a Commission registrant or registered entity as a matter of right, it is unclear to me whether the Commission has actually promulgated rules that permit the revocation of registration for a swap dealer.

Section 4s of the CEA13 governs the registration and regulation of swap dealers and major swap participants, but does not explicitly address revocation of registration. Section 8a of the CEA14 explicitly applies to the registration of an exclusive list of Commission registrants (intermediaries), but does not include swap dealers. Section 8a of the CEA authorizes the Commission to revoke registration, but only in certain circumstances as described in, for example, §§ 8a(2)(A)-(H), 8a(3), and 8a(4).

Although some of those provisions may permit the revocation of registration of a swap dealer, it is secondary to, for example, either a finding by a court of law or another Federal or State agency that a violation of the CEA occurred,15 or that the principal of a swap dealer was statutorily disqualified from registration,16 or that the swap dealer willfully aided or abetted in the violation of the CEA by another person, or failed to supervise a person that violated the CEA.17 Because these powers over registration only apply where there has been a violation of the CEA, I do not see how they can be applied to a violation of § 13 of the BHC Act.

Commission regulation § 3.6018 provides procedures for revocation of registration, but only pursuant to §§ 8a(2), 8a(3), and 8a(4), which do not directly apply to swap dealers as just discussed.

I am concerned that, because there does not appear to be any Commission regulation that permits the revocation of registration for a swap dealer, and because § 75.21 of the final rule does not include any procedures for an enforcement action taken by the Commission pursuant to § 13(e)(2) of the BHC Act, the Commission would not able to effectively enforce the Volcker Rule. Further, the Commission’s enforcement powers under the CEA are not available to enforce the Volcker Rule because the final rule was not promulgated under the CEA. I also reiterate that I am deeply troubled by the omission of procedures to afford due process to market participants.


As the Commission moves towards finalizing the last of the rules mandated by the Dodd-Frank Act, I believe it’s about time that it got back to the basics of good government and proper rulemaking. The final rule does neither because of the abuse of process in its rulemaking and the lack of due process and clarity in its enforcement procedures. Because of these fundamental flaws in the final rule, I cannot support it.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

2 12 U.S.C. § 1851.

3 5 U.S.C. § 500 et seq.

4 Gina Chon, CFTC Goes Its Own Way Over Volcker Rule, Fin. Times, November 23, 2013.

5 See SIFMA, ISDA & IIB v. CFTC, No. 13-CV-1916 (D.D.C.).

6 Dodd-Frank Act § 2(12).

7 Senators Carl Levin and Jeff Merkley, co-authors of § 619 of the Dodd-Frank Act, emphasized the importance of enforcement to the success of the Volcker Rule by urging the five responsible agencies to “provide coordinated and consistent enforcement, including data sharing by regulators” in their implementation of a final rule. Letter from Hon. Jeff Merkley, Member, United States Senate, and Hon. Carl Levin, Member, United States Senate, to Hon. Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System, Hon. Thomas Curry, Comptroller of the Currency, Department of the Treasury, Hon. Gary Gensler, Chairman, Commodity Futures Trading Commission, Hon. Martin Gruenberg, Acting Chairman, Federal Deposit Insurance Commission, and Hon. Mary Shapiro, Chairman, Securities and Exchange Commission (Apr. 26, 2012) (on file with the Commission).

8 7 U.S.C. § 1 et seq.

9 7 U.S.C. § 19(a).

10 Section 619(e)(2) of the Dodd-Frank Act provides:

(e) Anti-evasion.—

    (2) Termination of Activities or Investment.—Notwithstanding any other provision of law, whenever an appropriate Federal banking agency, the Securities and Exchange Commission, or the Commodity Futures Trading Commission, as appropriate, has reasonable cause to believe that a banking entity or nonbank financial company supervised by the Board under the respective agency’s jurisdiction has made an investment or engaged in an activity in a manner that functions as an evasion of the requirements of this section (including through an abuse of any permitted activity) or otherwise violates the restrictions under this section, the appropriate Federal banking agency, the Securities and Exchange Commission, or the Commodity Futures Trading Commission, as appropriate, shall order, after due notice and opportunity for hearing, the banking entity or nonbank financial company supervised by the Board to terminate the activity and, as relevant, dispose of the investment. Nothing in this paragraph shall be construed to limit the inherent authority of any Federal agency or State regulatory authority to further restrict any investments or activities under otherwise applicable provisions of law.

11 See, e.g., 12 U.S.C. § 1818(i).

12 7 U.S.C. § 9(c)(4)(A).

13 7 U.S.C. § 6s.

14 7 U.S.C. § 12a.

15 7 U.S.C. § 8a(2)(E).

16 7 U.S.C. § 8a(2)(H).

17 7 U.S.C. § 8a(3).

18 17 C.F.R. § 3.60.

Last Updated: December 18, 2013