Does Good Faith Compliance Actually Exist?


In the last few years since the 2010 Dodd-Frank Act was enacted, not much had come of the Volcker Rule until recently. In short, the Volcker Rule is a rule that prohibits banks from engaging in proprietary trading, subject, of course, to a multitude of exceptions. It was not until December 2013 that the proposed rule became the final rule, formally effective on April 1, 2014, but requiring full conformance only by July 21, 2015. This was another extension from the previous conformance date of July 21, 2014, which would have been a full four years after the passage of the Act; now there is another one-year delay.

Some take issue with the delay, claiming that even a three-year (not to mention the now five-year) wait for a fully effective rule was inordinately long. Others take issue with the substance of the rule. Still others, including myself, take issue with just one minor portion: the good faith compliance requirement.

Even though the rule is not yet in effect, and there is no requirement to be in full compliance until July 2015, there presently remains a requirement to be in “good faith compliance” with the rule. Yet the definition of “good faith” is difficult to comply with because no one really knows what it means at present. Consequently, various law firm notifications and other articles have attempted to clarify and explain the requirement.

For instance, one firm says that the good faith requirement is similar to what good faith means in other commercial settings. Because there is no clear way to understand what good faith means in the context of Volcker Rule compliance, the firm had to look to other, completely unrelated laws for a potential definition. Looking to the UCC, as this firm did, one notes that good faith is defined as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” This itself is difficult to understand, but at least provides a starting point for discerning the good faith requirement in the Volcker Rule context.

Other firms take an entirely different approach and say that the requirement demands that entities covered by the rule immediately undertake divestiture of their holdings and implement other safeguards to follow the current, not-yet-effective rule. This approach, requiring conformance with the good faith requirement before the rule itself is enacted, is contrary to the above approach, which is ambiguous as to a timeline. This lack of both agreement and guidance is ridiculous and can potentially lead to many firms facing fines or other sanctions.

My main issues with the good faith requirement are the lack of regulatory guidance (in the form of a release explaining the requirement in basic English, for example) and the fact that conformance is actually required even when the rule itself is not in force. This latter point is contradictory, and, to me, is an anomaly. Of course, regulators can advise entities to begin compliance as early as necessary in order for them to achieve full compliance by the conformance deadline – but to require even that is wrong. This new addition into controlling the activities of bankers, while perhaps based on a valid reason, to me, has gone too far.

In the wake of the recent financial crisis, I understand the need for further regulation; it is a logical way to solve the issues that destroyed the economy in 2007. Some of those issues stemmed from banks being too risky with their money, something that understandably needs to be regulated. However, to require compliance with a rule that is not yet in effect is unfair. Further, the regulatory agencies need to give more guidance to the institutions covered by the rule as to what is actually required of them; otherwise, widespread confusion will continue to result.


About Author

Comments are closed.

Fordham Journal of Corporate & Financial Law