On December 10, 2013, more than two years after the statutorily mandated deadline, five federal financial regulators published final regulations (hereinafter, the regulations) implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter, Section 619 or the statute). Together these are known as the Volcker Rule (hereinafter, the Volcker Rule or the Rule), which is designed to prohibit banks and their affiliates from engaging in risky, short-term, speculative trading and investing in private equity and hedge funds. These are practices long condemned by the Rule's namesake, former Federal Reserve Chairman Paul A. Volcker, for being at odds with conventional banking principles and potential risks to overall financial stability that could trigger the need for future bailouts. The same day that the regulations were issued, the Federal Reserve Board (FRB) set the date when conformance with the Rule is required as July 21, 2015, although that date could be extended an additional two years, and banking institutions and their affiliates are under an obligation to undertake good faith efforts to meet that date with full compliance. The Volcker Rule, which according to an analysis by one of the issuing regulators might impose significant costs on covered institutions, prohibits "banking entities" from engaging in "proprietary trading" and from making investments in or having relationships with hedge and similar "covered funds" that fall into certain exemptions from registering with the Commodity Futures Trading Commission (CFTC) as commodity pool operators or with the Securities and Exchange Commission (SEC) under the Investment Advisors Act. In concert with these broad prohibitions, the Rule carves out numerous exclusions and designates myriad activities as permissible so long as various terms and conditions are met. The statutory language provides only general outlines of prohibited activities and exceptions, while empowering the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the SEC, and CFTC (together, the federal financial regulators or the Agencies) to issue coordinated rulemakings to fill in the details and complete the difficult task of crafting regulations to distinguish prohibited activities from activities considered essential to the safety and soundness of banking institutions or to the maintenance of strong capital markets. What follows is a legal overview of the Volcker Rule. The report begins by analyzing the integral definition of "banking entity," which serves as the foundation for the applicability of the Rule. It then separately analyzes the two distinct components of the Rule: (1) restrictions on proprietary trading; and (2) restrictions on investing in and sponsoring covered funds. The basic framework of the Rule is to broadly prohibit banking entities from engaging in these two broad categories of activities, while also carving out specific exclusions from the scope of the two categories and exceptions for certain activities that otherwise would generally fall within the broad prohibitions. These excepted activities are designated as permissible under the Rule unless they would involve or result in a material conflict of interest; a material exposure to high-risk assets or high-risk trading strategies; pose a threat to the safety and soundness of the banking entity; or pose a threat to the financial stability of the United States. The report concludes by addressing other aspects of the Rule that apply generally to banking entities, including various compliance programs and reporting and recordkeeping obligations designed to implement the statute's anti-evasion provisions, as well as the requirements for divesting of legacy holdings and activities that do not conform with the Rule. Congress has delegated extensive discretion to the federal financial regulators to craft the Volcker Rule to meet a list of widely divergent objectives. The statute states the prohibitions and conditions in very broad terms and applies them to an array of financial institutions subject to a variety of regulatory regimes and separate regulators, foreign and domestic. It applies to community and global banks, every variety of insurance firm, securities firms, and foreign banking institutions operating in the United States, among others. The federal financial regulators have been tasked with diverse objectives, among which are the following: promoting safety and soundness of the entities covered by the Rule; protecting taxpayers and consumers; limiting inappropriate transfers of the safety net provided by FDIC deposit insurance; reducing conflicts of interests between the entities and their clients; limiting unduly risky activities by these entities; "appropriately" accommodating the business of insurance; and "appropriately" timing divestiture of illiquid assets affected by the Rule. The statutory language requires the regulators to explicate such critical terms as "banking entity," "covered fund," "illiquid fund," "trading account," "hedge fund," "reasonably expected near term demands of clients," "specific risks," and "ownership interest." It includes a broad explicit delegation of discretion to exclude from the basic prohibitions of the statute "[s]uch other activity as the appropriate [federal financial regulators] determine, by rule ... would promote and protect the safety and soundness of the banking entity and the financial stability of the United States." Consequently, the Volcker Rule is not likely to remain static over time. Rather, regulators likely will modify and clarify the requirements through regulations and guidance to address unforeseen complexities. In fact, as is discussed in the "Definition of 'Ownership Interest'" section of this report, the regulators have already issued an interim final rule that makes changes to the regulations as originally issued on December 10, 2013. The thrust of the Volcker Rule's restrictions applies to "banking entities." "Banking entity" is defined as: 1. FDIC-insured depository institutions. T his includes national and state banks, federal and state savings associations, thrifts, and similarly chartered banking institutions that offer FDIC-insured deposits. 2. Companies that own FDIC-insured depository institutions. This includes companies that own or control FDIC-insured depositories (by holding a certain percentage of voting stock or otherwise exerting a controlling influence over a company's decision making, such as the election of directors). Such companies are typically organized as bank holding companies (BHCs), financial holding companies (FHCs), or savings and loan or thrift holding companies. 3. Foreign-based companies that are treated like bank holding companies pursuant to the International Banking Act of 1978. This includes foreign-based banks that are permitted to operate branches in the U.S. or that own certain other domestic lending companies. An affiliate is "any company that controls, is controlled by, or is under common control with [a company described in categories 1-3]." 4. Affiliates and subsidiaries of companies described in 1-3. This covers "any company that controls, is controlled by, or is under common control with [a company described in categories 1-3]." In short, the Volcker Rule applies broadly to all depository institutions and to most companies that are owned by or have a common ownership interest with a depository. As a result, the Volcker Rule applies to the approximately 10,000 "community banks" scattered across the country. On the other side of the spectrum, the Volcker Rule applies to global financial conglomerates like Bank of America, Citigroup, JPMorgan, Wells Fargo, and Goldman Sachs, which are organized as FHCs and thus control at least one FDIC-insured depository institution. The rule also generally applies to hundreds of depository and non-depository affiliates and subsidiaries of these FHCs. However, the regulations provide certain exceptions to the definition of "banking entity," as discussed below. Additionally, the applicability of certain exemptions, recordkeeping and reporting requirements, and other aspects of the Rule vary to some degree according to the organization or typical activities of a particular banking entity. For example, because they may engage in little or no activities that are banned by the Volcker Rule, the recordkeeping and reporting requirements and other compliance standards that apply to community banks and their subsidiaries and affiliates generally will not be as onerous as those imposed on the country's largest FHCs. As another example, foreign banks and foreign affiliates of U.S. banking entities under certain circumstances will be permitted to trade foreign government obligations, but these activities generally are prohibited under the Volcker Rule's ban on proprietary trading for U.S.-based banking entities and U.S.-based affiliates of foreign banks. The Volcker Rule establishes an outright prohibition on proprietary trading by a "banking entity." Subsequent provisions of the legislation, however, provide activities that are excluded from the definition of "proprietary trading," as well as exceptions to the general ban as long as various conditions are met. The exact language provides a broad prohibition. It reads, "a banking entity shall not … engage in proprietary trading, ..." Under the statute, "proprietary trading" covers buying and selling of "financial instruments" by banking entities as "principal" for their "trading accounts." "Financial instruments" include securities, derivatives, and contracts for future sale or for options on any commodity other than foreign exchange or currency, but not loans. However, as described more fully below, certain types of financial instruments and operations are excluded. The regulation focuses on restricting short-term trades. It establishes a rebuttable presumption that any financial instrument held for fewer than 60 days is a banned proprietary trade unless all relevant facts and circumstances rebut the presumption. It defines "trading account" as any account used to buy or sell one or more financial instruments "principally" for "short-term resale," to benefit from "short-term price movements," to realize "short-term arbitrage profits," or to hedge any of these.