Volcker Rule Effects on Financial Services E-Discovery
Kenneth E. Bentsen, Jr., the president & CEO of the Securities Industry and Financial Markets Association, recently wrote a great op-ed titled “Holes in the Volcker Rule.” In his article, Mr. Bentsen explores one of the greatest challenges in interpreting and enforcing the Volcker Rule (part of the Dodd-Frank Act) — the lack of statutory direction for coordination among the five agencies tasked with writing the implementing regulations.
Those five agencies are the Commodity Futures Trading Commission (CFTC), the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC). Although Congress directed these agencies to write the regulations, as Mr. Bentsen notes, “it did not task any one agency or the agencies collectively with the interpretation, examination, supervision or enforcement of the final regulation.”
To address this omission, the agencies earlier this year formed a working group designed to coordinate enforcement of the Volcker Rule. But the group’s activities have been shrouded in secrecy — indeed, its existence wasn’t even announced until after its first meeting. And no single agency has taken lead responsibility for its work. Not a promising start for an effort to create clarity and reassurance to financial institutions that must comply with these complex regulations by July 2015. Mr. Bentsen illustrates the chaos that could ensue without further clarification:
Which regulator should a firm consult when questions arise? How does a firm seek clarification from the interagency group? . . . [W]hat happens if the SEC and its examiners take one point of view for a broker-dealer, while the OCC takes another point of view for the national bank in the same affiliated institution? Now add in the complexity of the CFTC reviewing the activities of the national bank for its registered swap dealer activities. What if the FDIC takes one view for nonmember banks and the Federal Reserve another for member banks?
The lack of a clear and consistent approach will not only make compliance challenging, but undoubtedly will generate expensive and inefficient discovery efforts when regulators start firing off document demands. For instance, imagine the burden on an organization that is asked by one regulator to provide a host of documents responsive to particular requests, in a specified format, and which then is asked by several other regulators to produce documents in response to similar – but not exactly the same – requests, and in different formats? What if the SEC agrees to allow a firm to use predictive coding to sort through a vast collection of documents and make its production, but the OCC insists on keyword search and manual review to find the same documents? The burden and cost of ediscovery imposed on financial services organizations subject to enforcement proceedings could be staggering.
For the sake of our clients in the financial services industry facing this risk, we encourage Congress and the regulators to heed Mr. Bentsen’s warnings, and take the necessary actions to create better coordination, clarity and transparency to enforcement of the Volcker Rule.