The final version is stricter than many had expected. Its goal is to reduce the kind of trades that nearly toppled the financial system five years ago and required taxpayer-funded bailouts.
At its heart, the rule seeks to ban banks from almost all proprietary trading. The practice of trading for their own profit has been very lucrative for big banks like JPMorgan Chase, Bank of America and Citigroup. The rule also limits banks' investments in hedge funds.
But the 920-page rule contains several exemptions that allow banks to continue proprietary trading in some instances. That raises questions about whether the government can completely limit extreme risk-taking in a complex financial world.
Congress instructed regulators to draft the Volcker Rule under the 2010 financial overhaul law. It was a high-priority proposal for President Barack Obama and named after Paul Volcker, a former Fed chairman who was an adviser to Obama during the financial crisis.
On Tuesday, Obama praised regulators for adopting a rule that ensures "big banks can't make risky bets with their customers' deposits."
Regulators won't begin enforcing the rule until 2015. The largest banks will be required to show next year how they are taking steps toward compliance.
The U.S. Chamber of Commerce on Tuesday said the rule could hurt Main Street businesses by making it harder for them to raise capital as banks' available cash is reduced. The business lobbying group hinted at a possible court challenge, saying it will "take all options into account as we decide how best to proceed."
Wall Street banks lobbied fiercely against the rule, arguing it could prevent them from using their own money to control risk in their portfolios.
Banks had also contended that the rule could limit financial trades if it prevents them from using their own money to take the other side of a client's trade. That's a practice known as market-making.
The final version of the rule does allow proprietary trading when it is done to facilitate market-making for customers.
Other exemptions include when banks are underwriting a securities offering, or when they are trading in U.S. government, state and local bonds.
Consumer advocates were encouraged by the final language in the rule, which went through several drafts and vigorous public and private debates. But they cautioned that the rule's implementation is a critical step that will prove whether it has real teeth.
"This is definitely a step forward," said Bartlett Naylor, financial policy advocate at the liberal group Public Citizen. Still, he said, "It's really up to (federal) supervisors to enforce it, and that's a matter of choice."
While the votes Tuesday at the Fed and FDIC were unanimous, the SEC and the CFTC split along party lines. Democrats at those agencies supported the rule, but Republicans opposed it.
The largest U.S. banks those with $50 billion or more in assets will be required to fully comply with the terms of the rule by July 2015.
Other banks will have until 2016 to comply.
The biggest banks will also be required to have compliance programs approved by their boards and senior executives. Banks will have to begin reporting on the status of those programs starting next year.
The banks' CEOs also will have to certify in writing to regulators that the banks have strong processes in place to ensure compliance.
The process of drafting of the rule was very complicated for several reasons. Regulators found it difficult to identify what constitutes proprietary trading in a bank's day-to-day operations. For example, banks often engage in market-making.
And then there's what's called portfolio hedging. That's when the bank makes trades on its own account to hedge, or offset, the risks of a broad investment portfolio as opposed to the risks of individual investments. It can be hard for regulators to distinguish when market-making and portfolio hedging cross over into proprietary trading.
The new rule, unlike an earlier version, doesn't allow portfolio hedging. And it stipulates that for banks to hedge risks of individual investments, they must match up in writing each hedge transaction with the risk it is designed to mitigate.
"You've got to say what you're hedging," said Michael Greenberger, a law professor at the University of Maryland who was a senior market regulator.