(The following is a reformatted version of a press release
issued by The U.S. Securities and Exchange Commission and
received via electronic mail. The release was confirmed by the
Dissenting Statement Regarding Adoption of Rule Implementing the
Volcker Rule 
Commissioner Daniel M. Gallagher 
Dec. 10, 2013 
Twenty-one months ago, I expressed my grave concerns regarding
the rulemaking process for the implementation of the Volcker
Rule, stating: 
The aggregate impact of the rulemakings we and our fellow
regulators are promulgating is massive, the costs are enormous,
and we are doing so at a time when our economy is still
hopefully limping towards recovery. These factors all argue for
an approach that is careful, systematic, but most importantly
regulatorily incremental...We must avoid regulatory hubris and
should not regulate--particularly where the changes are so novel
or comprehensive--with the belief that we completely understand
the consequences of the regulations we may impose. In many of
these areas, including Volcker, missing the mark could have dire
and perhaps irreversibly negative consequences.[1] 
The following week, my friend and former colleague Troy Paredes
made a public plea for a reproposal of the October 2011
implementing regulations, which I echoed in a speech shortly
thereafter - and have repeated publicly ever since.[2] 
Today, three and half years after Dodd-Frank was enacted and
over two years after the issuance of the proposed implementing
rules, the Volcker rule is being finalized in the shadow of
perhaps the greatest display of governmental hubris in our
lifetimes, as millions of Americans struggle to navigate the
unprecedented disaster arising from governmental intrusion into
our health care system.  One would expect this catastrophe to be
reason for caution and introspection as the government proceeds
with other major incursions into private markets, but that
apparently is not the case with the Volcker rule.  Regulators,
including those that, like the SEC, are purportedly independent,
have been commanded to “err on the side of doing a little more,
and then correct it if you’ve gone too far” in implementing the
mandates of Dodd-Frank.[3] 
The nonchalant suggestion to “err on the side of” overregulation
is fully in line with the staggering level of hubris reflected
throughout this joint rulemaking process, which has culminated
with a purely political insistence on a pre-year end vote.  In
contradiction of our procedural rules for voting on major rule
releases, including the longstanding guideline that
Commissioners should be given thirty days to review a draft
before a vote, we were given in early November not the draft
final rule itself, but 18 separate documents that we were told
would make up the final rule, along with two lists of
“interagency staff-level open issues.”  On the evening of
November 27th, the night before Thanksgiving and less than two
weeks before today’s vote, we were presented with revised
versions of those documents as well as a reminder that the
“back-end” sections were still being negotiated and would be
sent separately.  Not until five days ago did we have anything
even resembling a voting draft, giving us less than a week to
review the nearly one thousand pages of the adopting rule.  In
short, under intense pressure to meet an utterly artificial,
wholly political end-of-year deadline, this Commission is
effectively being told that we have to vote for the final rule
so we can find out what’s in it. 
Over the course of the past two years, I have repeated my calls
for a reproposal many times.  And recently, when it became clear
that my requests were falling on deaf ears, I even downgraded my
request simply to ask for a “fatal flaw” reproposal period of
two or three weeks in order to allow the millions of market
participants who will be affected by this brand new rule text
the opportunity to review it for the type of fatal flaws that
riddled the original proposal. My request has been completely
ignored by the mandarins at the banking agencies, who apparently
believe there is nothing to fear from a massive, untested
governmental intrusion into a vital segment of our economy.
Perhaps they can set up a ’’ web portal to implement
the rule and provide reassurance that if you like your capital
markets - still the deepest, fairest, and safest the world has
ever known - you can keep them...period. 
From the very beginning, the Volcker Rule has been a solution in
search of a problem, a common situation throughout the Dodd-Frank Act.  To quote former Treasury Secretary Geithner, “If you
look at the crisis, most of the losses that were material for
the weak institutions -- and the strong, relative to capital --
did not come from [proprietary trading] activities.  They came
overwhelmingly from what I think you can describe as classic
extensions of credit.”[4]  Paul Volcker himself explained,
“[P]roprietary trading in commercial banks was there but not
central” to the financial crisis.[5]  When asked by the New York
Times in 1923 why he wanted to climb Mount Everest, George
Mallory famously replied, “Because it’s there.“[6]  That may or
may not be a compelling reason to climb the world’s tallest
mountain, although I’ll note that Mallory and his climbing
partner disappeared during their 1924 Everest expedition, and
his body wasn’t discovered for 75 years. 
Even in the era of never letting a serious crisis go to waste,
however, the mere fact that proprietary trading makes a segment
of our policy establishment nervous[7] surely is not sufficient
justification to potentially destroy the market-making system
central to the liquidity and proper functioning of our capital
markets.  Years from now, I fear, financial historians will
marvel at how the Dodd-Frank Act forced regulators to
proactively disadvantage American financial institutions as well
as the strength and integrity of our capital markets to address
such tangential - at best - matters as conflict minerals,
resource extraction, and proprietary trading, but gave a
complete pass to the main cause of the financial crisis --
decades worth of disastrous federal housing policy. 
I believe that market making activities will be impacted most by
this faulty rule.  The importance of market making to our
capital markets - all of our capital markets, not just the
markets for large cap, well-traded equities - cannot be
underestimated.  Market makers play a unique role in providing
liquidity to investors by buying, selling and building and
holding inventory to meet anticipated future customer demand,
and often provide the majority of the liquidity for a given
security, especially in times of stress. 
What has often been lost in the argument over the scope of the
Volcker Rule’s market maker exemption to the prohibition on
proprietary trading is that market making is a service provided
by entities willing to accept the risk of holding positions in
securities in anticipation of customer demand.  Like any other
service providers, they expect to be compensated for their
efforts - hence the potential confusion between market making
and proprietary trading.  Like any other risk mitigators, they
accept only as much risk as they can reasonably handle - hence
the prevalence of larger, bank-affiliated broker-dealers in the
market making space.  As explained in the FSOC study on
implementing the Volcker Rule mandated by Section 619 of Dodd-Frank: 
In principal makers commit capital to
provide liquidity to their customers and ensure market
continuity. In doing so, the market maker assumes risk by
holding the purchased position on its balance sheet as
“inventory” until such time that the transaction can be
completed. Moreover, as some prior transactions are completed,
other new transactions will be initiated such that the market
maker will always be taking risk as long as the market making
activity is performed. This activity is especially complex in
illiquid markets or in a liquid market where an order is very
large, as a market maker may be required to assume significant
market risk between the time that the large order is purchased
and sold back into the market.[8] 
What makes today’s flawed rulemaking particularly egregious is
the fact that the financial institutions that are subject to the
Volcker Rule have long since abandoned their pure prop trading
desks.  Notwithstanding three years of fraught negotiations over
the implementing regulations, the legislative text was clear
from day one: banking entities and their affiliates are
prohibited from proprietary trading, as well as from sponsoring
or investing in “covered funds” such as hedge funds or private
equity funds.  The financial institutions impacted by the
Volcker Rule long ago accepted this fact and, from all accounts,
have acted accordingly.  The banks targeted by the rule have
long since shut down their pure proprietary trading operations
and taken steps to ensure their compliance with the legislative
text in anticipation of final implementing regulations.  Think
of these institutions what you will, but even their staunchest
critics would acknowledge that they are not suicidal.  They are
well aware that an army of banking regulators, many situated on-site, will monitor their every move in connection with this
high-profile rule. 
In short, pure prop trading by banking entities has almost
completely disappeared, and what remains is to define and
regulate the grey area activities that may or may not constitute
prop trading - activities which encompass, crucially, virtually
the entire field of market-making.  What we face, therefore, is
the prospect of banning the market-making practices so central
to our capital markets in order to make sure we capture every
last activity that could potentially be characterized as prop
trading.  One could say, in fact, that to ensure that the final
1% of potentially proprietary trading be hunted down and
eliminated, the agencies are willing to place at risk 99% of all
market-making activities.  Talk about the tyranny of the 1%. 
We’ve been assured that we can always “correct” the implementing
regulations for the Volcker Rule if it turns out they’ve gone
“too far.”  This assurance, however, is based on a bank-centric
view of regulation and a dangerous misunderstanding of the
Commission’s regulatory program.  Prudential regulators such as
the banking agencies can indeed employ their discretion in
seeking to obtain their desired regulatory outcomes.  Their
prudential regulation and statutory confidentiality protections,
not to mention their embedded staff’s constant interaction with
regulated entities, allows them to bend their rules when they go
“too far.”  The Commission’s rules-based regulatory regime,
however, contains no such wiggle room.  Our rules are rules, and
when our examiners come across a rule violation, whether
egregious and intentional or peripheral and accidental, they are
required to record such violations.  We cannot and should not be
engaging in the recently vogue practice of selectively enforcing
the law.  Call me old-fashioned, but I prefer my regulators to
get the rules right, rather than to railroad them into effect
while assuring me that there is nothing to worry about if they
get them wrong. 
Reassurances about the process of enforcing the implementing
regulations, in any case, ring hollow in the context of the saga
of developing those regulations, a procedural disaster capped by
a headlong rush to meet a purely political deadline.  The
original rule proposal included nearly four hundred distinctly
numbered “questions,” although the actual number is much higher
given the multiple queries posed in most of the questions.  It
generated nearly 19,000 comment letters, including unusually
pointed criticisms from our foreign regulatory counterparts.
Asking questions in a proposing release is often an exercise in
good government -- regulators should never assume they have all
the answers -- but questions do not substitute for expertise.
Questions should help regulators with the finer points of
rulemaking after the difficult decisions have been made.
Expertise should be used when crafting rule proposals, and what
is actually being proposed should be reflected cleanly in
proposed CFR text.  Regulatory humility should cause regulators
to ask questions that can help in calibrating a final rule, but
the questions should not be proposals in disguise.  The Volcker
Rule proposal, it turns out, was simply a series of questions in
search of a proposal.  Now that we have one, it should be
noticed for comment.  Instead, we are promulgating this rule
despite the fact that redlines of the proposed 2011 CFR text
against the final CFR text are dripping from front to back with
wholesale blocks of red. 
While the Volcker Rule applies to “banking entities” and their
affiliates, affecting a wide range of financial institutions
regulated by the five different agencies tasked with drafting
the implementing regulations, I have long argued that the
Volcker Rule addresses a set of activities - the trading and
investment practices of those entities - that fall within the
core competencies of the SEC, and expressly envisions that
quintessential market-making activity continue within these
firms.[9]  In February 2012, I lamented the fact that, as CFTC
Chairman Gensler said at the time, “The bank regulators have the
lead role” in drafting the implementing rules,[10] which
certainly shone through in the proposing release - indeed, the
overwhelming volume of questions is an indictment of the
backseat role the SEC played early in the process.  How many of
those questions could have been answered by SEC staff?  How many
were answered by our staff but were included in the proposing
release anyway in the hopes of receiving from commenters answers
more amenable to the banking regulators? 
I have only seen this degree of interference in the affairs of
ostensibly independent agencies once before, in last year’s
blatant attempt by FSOC - including the leaders of many of the
same agencies involved in today’s rulemaking - to dictate the
timing and content of money market mutual fund rulemaking by
threatening to usurp the SEC’s rulemaking authority.  This kind
of interference is the product of an idealistic and ideological
“book club” mindset unburdened by the knowledge of how
complicated it is to establish and oversee regulatory programs,
as well as the impact that those programs have on our capital
Also less than reassuring is the meager, so-called economic
analysis contained in the adopting release.  Our fellow
regulators have argued that because this rulemaking is being
promulgated under the Bank Holding Company Act, rather than the
securities laws, we don’t need the detailed economic analysis
that our governing statutes and our own internal guidelines
require us to perform for all of our rulemakings.  Apparently,
our lawyers and a majority of the Commission agree with that
legal analysis.  Perhaps that was the Commission’s real mistake
in connection with the shareholder access rule, which was
vacated by the D.C. Circuit in 2011 on the grounds that the
Commission had “acted arbitrarily and capriciously for having
failed once again...adequately to assess the economic effects of
a new rule.“[11]  Maybe if we had promulgated Rule 14a-11 under
another statute -- something like the Smoot-Hawley Tariff Act of
1930, for example -- we would have been able to parry the
circuit court’s concerns as easily as our regulatory colleagues
have parried our insistence that we obey the tenets of good
government and the letter of the law by including a real
economic analysis in the Volcker Rule adopting release. 
So do the final implementing rules improve upon the proposal?
The answer is, quite simply, that we don’t know.  All we can say
for sure is that the final rule set jettisons scores of flawed
assumptions and incorrect conclusions in favor of new, unproven
assumptions and conclusions.  The proposing release was so
dominated by questions - there are a total of 1,347 question
marks in the release - that it may as well have been a concept
release, while the comment letters we received in response were
of such volume and vehemence as to suggest that perhaps we
should have asked more questions before setting forth the
assumptions and conclusions railed against by commenters.  To
move directly to adoption is poor judgment and the height of
regulatory hubris. 
Notwithstanding all of the changes from the proposal to the
final version of the implementing regulations, the final release
retains the same fatally flawed approach, which lies at the
heart of why this rule will be so damaging to our markets.  The
regulations governing proprietary trading are still
fundamentally predicated on the presumptions that trades are
proprietary and funds are covered funds unless proven otherwise.
Guilty, in other words, until proven innocent.  The chilling
effects of these presumptions cannot be understated - in a
sense, they are the implementing rules.  The details of what
criteria entities must demonstrate they meet to escape these
negative presumptions, are just that - details.  What matters is
that the de facto burden of proof lies with the banking
entities, not the regulators. 
Before I conclude, I would like to note that at least one set of
comments I made on the Volcker Rule process appears to have
borne fruit - my vehement insistence that, following the
marginalization of the SEC staff in the drafting of the
proposing release, our staff must play a strong and vigorous
leadership role in the rulemaking process.  I am pleased to say
that Commission staff did indeed play a greater role as the
interagency rulemaking process progressed, and I commend the
staff for their hard work and for remaining faithful to the
Commission’s mandate to protect investors, maintain fair and
efficient markets and promote capital formation in the face of
constant pressure from the safety-and-soundness-focused banking
regulators.  I also commend Chair White who, despite the
difficult position she inherited, ensured that the voice of our
staff continued to be heard at the negotiating table.  While it
appears that, in recent weeks, pressure applied both from within
and without the Commission has chipped away at the improvements
made by our staff, that does not detract from the hard work and
dedication the staff has once again displayed throughout the
three-year slog of drafting implementing regulations for the
Volcker Rule. 
It is my hope that when, inevitably, changes need to be made to
address the failures and shortcomings of the rules being
promulgated today, the agencies choose to undertake a proper
rulemaking process to correct its many errors.  I stand ready,
willing, and eager to engage in such a process.  For the reasons
discussed above, however, I strongly dissent from today’s
[1] Commissioner Daniel M. Gallagher, Remarks at the Credit
Suisse Global Equity Trading Forum, February 17, 2012 (available
[2] See Commissioner Troy A. Paredes, Remarks at “The SEC Speaks
in 2012”, February 24, 2012 (available at
_vRDsdU); Commissioner Daniel M. Gallagher, Ongoing Regulatory
Reform in the Global Capital Markets, March 5, 2012 (available
[3]  ’Volcker Rule’ Faces New Hurdles, Wall Street Journal,
November 19, 2013 (available at
208280070554384).  In a July interview, Treasury Secretary Lew
stated, “What I’m arguing is we need all the tools in Dodd-Frank
to make sure we’ve ended too big to fail...It is unacceptable to
be in a place where too big to fail has not been ended, and one
of the things I guess I would say is that any efforts to delay
or dilute the implementation of Dodd-Frank, if we get to the end
of this year, and cannot, with an honest, straight face, say
that we’ve ended ‘too big to fail,’ we’re going to have to look
at other options because the policy of Dodd-Frank and the policy
of the administration is to end ‘too big to fail.” Jack Lew
answers Well Street’s questions (CNBC broadcast), July 17, 2013
(available at
This statement, which of course raises the question of how
anyone could, “with an honest, straight face” suggest that the
Dodd-Frank Act has anything at all to do with ending, rather
than institutionalizing, too big to fail, was prelude for a
remarkable intervention in August, when the President called the
heads of the agencies charged with implementing the Dodd-Frank
Act to the White House to convey “the sense of urgency that he
feels” about the need for prompt implementation of the Act.
Obama Presses for Action on Bank Rules, New York Times, August
19, 2013 (available at 
[4] “Volcker Rule” is the Wrong Response to the Financial
Crisis, Financial Services Forum ForumBlog, September 19, 2009
(available at 
[5] Volcker: Proprietary trading not central to crisis, Kim
Dixon and Karey Wutowski, Reuters, March 30, 2010 (available at: 
New York Times, 18 March 1923. 
[7] To quote former Chairman Volcker once again, “proprietary fact may often operate at cross purposes with
[banks’] fiduciary responsibilities” Volcker: Proprietary
trading not central to crisis, Kim Dixon and Karey Wutowski,
Reuters, March 30, 2010 (available at: (emphasis added). 
[8] Study & Recommendations on Prohibitions on Proprietary
Trading & Certain Relationships with Hedge Funds & Private
Equity Funds, Financial Stability Oversight Council at 19 (Jan.
2011) (available at
[9] Commissioner Daniel M. Gallagher, Remarks at the Credit
Suisse Global Equity Trading Forum, February 17, 2012 (available
[10] Testimony of Gary Gensler, Chairman, Commodity Futures
Trading Commission, before the U.S. House Financial Services
Subcommittees on Financial Institutions & Consumer Credit and
Capital Markets & Government Sponsored Enterprises (January 18,
[11] Business Roundtable and Chamber of Commerce of the United
States of America v. Securities and Exchange Commission (D.C.
Cir. July 22, 2011). 
(bjh) NY 
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