Volcker Rule’s Impact On Bank Incentive Compensation Arrangements

On December 10, 2013, the SEC, FDIC, OCC and Federal Reserve jointly approved the so-called Volcker Rule, prohibiting banking entities and certain nonbank financial institutions (collectively, "banks") from engaging in proprietary trading or owning interests in or sponsoring certain hedge funds or private equity funds. The rules go into effect on April 1, 2014, but banks will have until July 21, 2015 to come into full conformity with the new rule.

The new rule provides that banks may engage in certain trading activities — specifically, underwriting, market-making and risk-mitigating hedging activities — without violating the rule, provided that (among other things) the bank designs its incentive compensation arrangements for employees engaged in such activities so as not to reward or incentivize prohibited proprietary trading. The agencies state that their goal is not to prohibit employees from being rewarded when these activities generate trading profits for a