WASHINGTON — Banks may have won breathing room last year on when certain hedge fund and private equity holdings comply with the Volcker Rule, but another key deadline tied to the trading ban is fast approaching.

By July 21 institutions must stop proprietary trading and end prohibited investments in hedge and private equity funds made after 2013. The effective date is expected to have limited effect on community banks with no trading desks and well-prepared large institutions. But midsize banks with trading exposures are said to be feeling under the gun since their Volcker compliance programs are still being developed.

"They're the ones whose trading and investment activities are going to be touched, or poked or grazed by the Volcker rule, but in many cases their activities don't involve any sort of sustained or significant involvement, much less immersion in Volcker, as it would be with the largest banks," said Tim Keehan, vice president and senior counsel of the American Bankers Association.

The rule, first proposed by former Federal Reserve Board Chairman Paul Volcker and mandated by the Dodd-Frank Act, prohibits banks from profiting directly from their own trading books and restricts relationships with certain "covered funds." Confusion over which funds are restricted and which are exempted led the Federal Reserve Board in December to announce effectively a two-year extension — to 2017 — on compliance for "legacy" covered funds.

But the ban on simple proprietary trading, and compliance for nonlegacy fund investments — made in 2014 or later — were not included in the extension and must be implemented this month.

Keehan said large multinational banks — which have drawn the most amount of attention from regulators to get their Volcker compliance programs in shape — are the most prepared, while community banks will likely draw little scrutiny since they do little to no trading. But midsize banks are "caught in between," he said.

Although regulators will likely be interested in medium-sized banks' implementation of the rule, some institutions are still trying to clarify how advanced their compliance programs need to be relative to larger institutions, observers said.

"The challenge is, they have very little guidance from the regulators, so nobody knows how detailed is detailed enough," Keehan said.

Ernest Patrikis, a partner at the law firm White & Case and a former official with the Federal Reserve Bank of New York, agreed that midsize banks are most likely to feel the squeeze from regulators. But how aggressively the rule is enforced may depend on the examiner looking at the bank and the agency with jurisdiction. (At the regulatory level, the rule is implemented by the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Securities and Exchange Commission and Commodity Futures Trading Commission.)

While more established compliance regimes such as anti-money-laundering have guidance for examiners, Volcker Rule compliance is still uncharted territory, Patrikis said.

"What's going to be interesting is: what will the examiners do when they come into look at Volcker rule compliance, and how well trained are the examiners?" he said. "There's no public examinations manual as there are for other banking activities. So what is it going to be like?"

Previously, the regulators had set July 2014 as the compliance deadline, but later extended that by one year.

None of the bank regulators would comment on the record about their approach to enforcing the Volcker rule by press time. However, the expectation is that regulators will be flexible at least in the early going. Enforcement may become tougher after subsequent implementation deadlines have passed.

While banks above $50 billion in assets began reporting trading activity last year, smaller institutions do not have to begin reporting under the rule until next year. Next year is also when large-bank chief executives must begin submitting certifications that their institution complies with the Volcker Rule.

Certain areas of the rule are also still a moving target in Congress. Some lawmakers have called for simply exempting banks with less than $10 billion from the rule altogether, and they have support from some regulators. Meanwhile, compliance may be a nonissue for institutions with minimal trading activity.

Doreen Eberley, who heads the FDIC's risk management and supervision office, said in a Senate Banking Committee hearing in September that the rule was crafted in a way that would make compliance much simpler for banks that have little or no exposure to prohibited activities.

"For community banks that are less than $10 billion in assets but do engage in activities covered by the Volcker Rule, compliance program requirements can be met by simply including references to the relevant portions of the rule within the banks' existing policies and procedures," Eberley said. "This should significantly reduce the compliance burden on smaller banks that may engage in a limited amount of covered activities."

Keehan said he expects, at least for the first round of supervision, that evidence of a compliance regime simply existing will be sufficient. He added that he is not aware of any bank falling short of that.

"I have not come across a single bank that is not trying its darnedest to come into compliance with Volcker," Keehan said. "If a bank is that derelict … they have what's coming to them, but I don't know a single bank that's in that situation."

Chris Cole, vice president and senior regulatory counsel for the Independent Community Bankers of America, said that in general community banks are not going to be drastically affected by the July 21 deadline, because most community banks generally do not have extensive trading desks.

But the group is still pushing for a legislative fix that would exempt community banks from the rule because of the concern that the prohibition on proprietary trading could limit banks' ability to hedge legitimate business risks, and that will be a persistent compliance headache even after the deadline.

"The proprietary trading part does require any community bank doing any hedging activities, any sort of derivative activities dealing with interest rates … to develop policies to ensure they are not violating Volcker," Cole said. "That part of it is something that community banks are always going to have to deal with in one way or another."

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