SEC Proposes “Volcker Rule” Requirements

Published on: 14 Oct 2011

On October 12, 2011, the SEC issued a proposed rule that would implement Section 619 (also known as the “Volcker Rule”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The proposed rule would prohibit and restrict banking entities1 and nonbank financial companies2 that are supervised by the Federal Reserve (with certain exemptions) from (1) engaging in proprietary trading and (2) having certain interests in, or relationships with, a hedge fund or private equity fund. Affected entities would be required to implement internal programs to monitor and ensure compliance with the prohibitions and restrictions of Section 619. In addition, firms with significant trading operations would be required to report certain quantitative measurements associated with their trading activity to the appropriate federal regulatory agency and banking entities. The purpose of supplying such information is to help these organizations determine which market activities are permissible and which constitute prohibited proprietary trading.

As anticipated, the Volcker Rule has received much attention because of the significant impact it could have on the operations of banks and other financial companies. However, the proposed rule’s true impact remains unclear, since there are over 400 constituent questions that still need to be addressed on topics such as (1) the types of transactions that should be permitted or prohibited in connection with banks’ trading activities, (2) bank investments in covered funds (e.g., relative to private equity and hedge funds), and (3) the nature of the compliance regime required for implementation of the proposed rule.

Comments on the proposed rule are due by January 13, 2012.


[1] Footnote 3 of the proposed rule states, in part, “The term ‘banking entity’ is defined in section 13(h)(1) of the BHC Act, as amended by section 619 of the Dodd-Frank Act. See 12 U.S.C. 1851(h)(1). The statutory definition includes any insured depository institution (other than certain limited purpose trust institutions), any company that controls an insured depository institution, any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106), and any affiliate or subsidiary of any of the foregoing.”

[2] Footnote 4 of the proposed rule states, in part, “A ‘nonbank financial company supervised by the [Federal Reserve] Board’ is a nonbank financial company or other company that the Financial Stability Oversight Council . . . has determined, under section 113 of the Dodd-Frank Act, shall be subject to supervision by the Board and prudential standards.”

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