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SEC chair notes her views on the “Volcker Rule”

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Feb 06, 2014

In recent testimony, SEC Chair Mary Jo White expressed her views on certain aspects of the SEC’s final rule that implemented Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the “Volcker Rule.” The Volcker Rule generally prohibits banking entities from engaging in proprietary trading of covered funds and imposes limitations on their ability to sponsor or invest in such covered funds.

Her comments centered on (1) the development of the final rule, (2) the scope of a covered fund, (3) trading by foreign banking entities, (4) the final rule’s effect on market makers and underwriters, and (5) compliance and enforcement.

Ms. White noted the “enormous volume of public input, diverse in both source and substance” that was received and described the extensive efforts and collaboration of the five federal agencies — the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the CFTC, and the SEC — to consider the feedback in the joint development of a “well-balanced rule that both reduces the potential impacts on market liquidity and addresses concerns about proprietary trading through robust compliance requirements.”

She also acknowledged changes that resulted from the input received. For example, after considerable feedback that the scope of a “covered fund” was too broad, the definition was updated to exclude certain entities that do not have the same risks as the covered funds targeted by the rule. These entities include (1) general corporate entities, (2) mutual funds and certain public foreign funds, and (3) non-U.S. broad-based pension, retirement, or similar plans. The scope also includes a foreign fund as a covered fund only if it has ties with a U.S. banking entity.

Further, Ms. White described how a U.S. entity is only permitted to trade with a foreign banking entity if certain conditions are met. Ms. White stated that the provisions affecting trading with a foreign banking entity are “designed to limit the risk to the United States arising from proprietary trading by foreign banking entities, while, within statutorily permitted limits, creating a reasonable competitive parity between domestic and foreign banking entities and helping to ensure that U.S. investors can continue to benefit from liquidity provided by foreign banking entities.”

Chair White also indicated that the final rule’s provisions that implement the Volcker Rule’s proprietary trading prohibitions will allow “market makers and underwriters to continue to contribute to the liquidity of the markets and respond to the needs of the marketplace, while limiting the financial risks that may arise from such activities.”

Lastly, she commented on the compliance and enforcement of the final rule. As additional participants seek compliance with the final rule, Ms. White expressed her belief that the five agencies should continue to collaborate to form coordinated guidance. She also noted the creation of an interagency working group that will have ongoing discussions on the implementation and enforcement of the final rule.

The full text of Ms. White's testimony is available on the SEC's Web site.

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