Volcker Rule to Require CEOs Guarantee Compliance

Volcker Rule to Require CEOs Guarantee Compliance

Decision Marks Latest Setback for Wall Street Firms

SCOTT PATTERSON

Updated Dec. 5, 2013 7:36 p.m. ET

WASHINGTON—The Volcker rule will require bank executives to guarantee their firms are in compliance with the regulation, said people familiar with the rule, another setback for Wall Street firms that lobbied against such a requirement. The inclusion of so-called CEO attestation is intended to help increase accountability at firms by ensuring that top executives know what types of trades are occurring at their firms, these people said.Forging the ‘Volcker Rule’

U.S. Treasury Secretary Jack Lew referenced the need for such accountability in a speech Thursday, saying the Volcker rule “puts in place strong compliance requirements that require those in charge of financial institutions to make sure that the ‘tone at the top’ sends the right signal to the whole firm.”

Regulators are expected to approve the Volcker rule next week, putting in place a long-awaited provision of the 2010 Dodd-Frank financial law to prevent banks from engaging in proprietary trading or making risky bets with their own money.

The Volcker rule didn’t include CEO attestation when it was first proposed in November 2011, disappointing Democrats who had pushed for the mandate.

The Financial Stability Oversight Council, a group of top regulators created by Dodd-Frank, recommended the requirement in a study before the rule was proposed. The council’s study said the rule should require “public attestation by the CEO that compliance standards are continually being met.” Five of the FSOC’s members are also the top officials at the agencies writing the rule. The council is led by Mr. Lew.

Wall Street banks have opposed CEO attestation, saying it would be difficult for a chief executive to know with any certainty that proprietary trading wasn’t occurring across a bank’s sprawling operations.

“The issue is whether it creates individual liability for that executive,” said Joseph Grundfest, a professor of law and business at Stanford University and a former SEC commissioner. The rule could lead banks to create a system of sub-certifications, in which business heads who report to the CEO, and possibly their subordinates, must sign off on the activities of their units, Mr. Grundfest said. That is how many companies responded to the certification rules in the landmark Sarbanes-Oxley Act 11 years ago, he added.

The move marks another defeat for Wall Street, which had opposed the requirement. Banks also lost a fight to retain the ability to engage in “portfolio hedging,” or entering trades to protect a broad basket of assets. The Wall Street Journal reported this week that the Volcker rule won’t allow banks to engage in portfolio hedging.

That decision was made as part of an effort to ban trades that led to the “London whale” episode, in which J.P. Morgan Chase & Co. traders lost more than $6 billion on complex derivatives trades that the firm described as portfolio hedges.

Efforts to implement Dodd-Frank have “taken longer than we hoped,” Mr. Lew said in his speech at the Pew Charitable Trusts, adding the rules are largely falling into place. He said it is critical U.S. regulators have resources to enforce the law and called for the adoption of robust protections by global counterparts to fortify the international financial system.

“This is not about writing a set of rules, and then walking off the field,” said Mr. Lew. “This will require ongoing attention—ongoing fact-finding, review, analysis, and action.”