The Volcker Rule is a federal rule on proprietary trading mandated by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule restricts an insured depository institution and its affiliates from engaging in proprietary trading; acquiring or retaining any equity, partnership, or other ownership interest in a hedge fund or private equity fund; and sponsoring a hedge fund or a private equity fund.
As approved in December 2013, the rule harmonizes the treatment of municipal securities with how municipal securities are treated under existing federal securities laws. The rule does not make artificial distinctions between municipal securities issued by state and local governments and those issued by their agencies or authorities.
“The MSRB is pleased that the federal financial regulators agreed with the MSRB’s analysis and amended the initial proposal to avoid an unnecessary bifurcation of the municipal market,” MSRB Chair Dan Heimowitz said in a statement on December 9, 2013. “Exemption of all municipal securities as defined by the Securities Exchange Act ensures that the municipal market will not be splintered unnecessarily as a result of the Volcker Rule.”
The draft Volcker Rule was published for comment in October 2011 by the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and the U.S. Department of the Treasury Office of the Comptroller of the Currency.
The MSRB submitted a comment letter to regulators in January 2012 that urged expansion of the governmental obligations exemption to include all municipal securities. The letter argued that the draft Volcker Rule would exclude agencies of states and political subdivisions from the exemption, resulting in a “bifurcation” of the municipal securities market without benefiting the soundness of the banking system.