The Volcker Rule is a federal regulation enacted as part of the Dodd-Frank Wall Street Reform Act of 2010, prohibiting banks from using client deposits for their own profit. The federal regulation doesn’t allow banks to own, sponsor, or invest in private equity funds, hedge funds, or any other trading operations for their own gain, also called proprietary trading, which is a white collar crime. The Volcker Rule is named after Federal Reserve Chairman Paul Volcker, who originally proposed it.

The rule protects depositors from risky operations that ultimately led to the 2008 financial crisis, and the damage caused when Congress repealed the Glass-Steagall Act in 1999, which had isolated commercial banking from investment banking.

Exceptions and Updates

The Volcker Rule allows trading under two circumstances:

• When it is necessary to operate their business. This includes hedging, underwriting, market-making, and trading if it’s to limit their own risk.
• When banks can act as a broker, custodian, or agent for their clients. This allows the bank to trade on behalf of their client with the customer’s approval.

In June of 2020, the United States Securities and Exchange Commission (SEC) released the final rule modifying the Volcker Rule. It included three areas:

• Clarified the prohibition against banks’ usage of private equity funds and hedge funds
• Allowed specific non-risky activities that had been previously banned
• Limited the impact of the Volcker Rule on banks’ foreign undertakings

How Does the Volcker Rule Affect Commercial Real Estate Investors?

The Volcker Rule can impact commercial real estate investors in a variety of ways, including:

• Keeping their deposits safe because their bank cannot use them for high-risk investments
• Preventing another $700 billion bailout, which happened during the 2008 Great Recession
• Prohibiting banks from investing in private equity or hedge funds, including commercial real estate