Protesters demonstrate inside Bear Stearns headquarters in New York in 2008. The now defunct bank engaged in the kind of risky trading that the Volcker Rule aims to rein in. Chris Hondros/Getty Images

As regulators prepare to implement what many see as one of the biggest regulatory changes in years to how Wall Street operates, both bankers and their adversaries are voicing concern over the complexity and scope of a rule meant to rein in risk at big banks. The so-called Volcker Rule, which was crafted by former Federal Reserve Chairman Paul Volcker, aims to stop big banks — specifically those that are granted deposit insurance by the federal government — from taking high-risk bets with other people’s money. It was proposed as part of the Dodd-Frank Act of 2010, a behemoth bill passed in response to the 2008-09 financial crisis. The rule started as a simple ban on proprietary trading (banks trading for their own profit, not clients’ gain) and a ban on banks investing in hedge funds, which often make higher-risk trades. Hedge funds, unlike consumer banks, aren’t insured by the Federal Deposit Insurance Corporation. But over the last three years, the rule became progressively longer and more complex, as banks and their lobbyists debated with federal officials and experts about exceptions and caveats. On Tuesday, the Securities and Exchange Commission, one of five regulatory agencies charged with enforcing the Volcker Rule and the only one that hasn’t yet given its nod of approval, is expected to vote in favor of implementing it. That will likely kick off a months-long process of figuring out what it actually means.

Guessing game

The final rule is expected to be dozens of pages long, with hundreds of pages of attached commentary. The length and complexity of the ruling has led bankers to worry that it would overly burden banks with figuring out what they can and cannot do in the course of ordinary business. It has also led activists and analysts to worry that the number of exceptions built into the rule would leave banking largely unchanged and wedded to the same practices that led the country to crisis just a few years ago. “Regulators have done the best they can with this rule,” said Bill Singer, a lawyer who works with securities firms and others in the financial industry. “Unfortunately, ‘the best they can’ rarely works ... It’s nearly 1,000 pages. Who the hell knows what it says?” The specifics of the Volcker Rule have been in flux since its inception, but that hasn’t stopped banks from taking educated guesses about what they may have to do in order to fall in line with it. Many banks have already closed their proprietary-trading departments. But other potential elements of the rule, like the ability of banks to invest in hedge funds, have been met with more resistance. Banks lobbied hard to get that provision changed. In one draft of the ruling, regulators allowed for an exception to the hedge-fund prohibition if the bank started the hedge fund in-house. Now it’s not clear whether that would be allowed. “If they can own a hedge fund, they can get around the entire rule,” said Alexis Goldstein, communications director for the Other 98%, a nonprofit organization advocating for alternative economic policies. Banks and trade groups have said the complexity of the rule puts an unneeded regulatory burden on their businesses. The U.S. Chamber of Commerce, a trade group for companies in many sectors, including banking, wouldn’t comment for this story but has sent several letters to regulators urging them to spend more time understanding the rule before implementing it. “The rule may have unintended but detrimental impacts upon growth, operations and cash management,” the Chamber of Commerce wrote in one letter. “We believe that it is more important to get the Volcker Rule right than meet an artificially imposed deadline.”

Complex by design?