Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the “Volcker Rule”, essentially prohibits “banking entities” from engaging in “proprietary trading” and from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or a private equity fund. The rule has been controversial not only because of its substantive content but also due to its extraterritorial reach, which has a significant impact on foreign banking entities that have U.S. affiliates. The Volcker Rule’s extraterritoriality lies within the broad definition of the term “banking entity”, which includes not only insured depository institutions and U.S. bank holding companies, but also non-U.S. banks which have a U.S. branch or agency and any affiliate of the foregoing on a world-wide basis, whether or not they are organized or located in the United States.
The application of U.S. regulations to entities operating abroad merely because the entities happen to have a U.S. branch is contradictory to the principles of international law. The principles of international law are based on the idea of the sovereignty of nations and territorial application of the law. Yet, in light of the context in which the Volcker Rule was enacted—a crisis which required immediate global regulation of proprietary trading—it was probably the most efficient measure at a moment where other foreign regulators were moving slower and did not show any specific intention to regulate the matter. However, in the quest towards efficiency—and in consideration of the potential for inconsistent regulation among different countries—financial regulators around the world should work towards a uniform and transparent approach that would, ideally, be acceptable by all concerned parties.