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Speech by SEC Chairman:
Opening Statement at SEC Open Meeting: Item 1 — Prohibitions and Restrictions on Proprietary Trading


SEC Chairman Mary Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
October 12, 2011

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on October 12, 2011.

The Commission today will consider two proposals stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act.

  • First, we will consider whether to propose a rule to implement Section 619 of the Dodd-Frank Act — or what we commonly refer to as the Volcker Rule.
  • Second, we will consider whether to propose new rules that would set out the registration process for security-based swap dealers and major security-based swap participants.

I would like to thank the U.K. Financial Services Authority and its technical staff as well as the Commission’s technical staff for making it possible for me to participate in this open meeting from London. Although I do not know if this is a first for the Commission, it certainly is a first for me, and I appreciate the effort that has gone into facilitating this transatlantic open meeting to propose these important Dodd-Frank Act rulemakings.

* * *

We begin with the proposal to implement the Volcker Rule, which generally prohibits certain banking entities from engaging in proprietary trading or sponsoring or investing in a hedge fund or private equity fund.

The statute is intended to curb the proprietary interests of commercial banks and their affiliates in order to protect taxpayers and consumers by prohibiting insured depository institutions from engaging in risky proprietary trading. Section 619 is a key component of the Dodd-Frank legislation. Its implementation would be a step forward in reducing conflicts of interests between the self-interests of banking entities and the interests of their customers. The statute is aimed at constraining banking entities’ proprietary trading, protecting the provision of essential financial services and promoting the stability of the U.S. financial system.

In drafting this proposal, the Commission worked with our fellow regulators to ensure the rule will be applied consistently across institutions. Indeed, today’s rule is being proposed jointly with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and eventually the CFTC. This has been an extensive undertaking. Throughout the process of formulating this proposal, the SEC staff worked actively and continuously with the staffs of our fellow regulators in this collaborative effort, marked by more than a year of weekly, if not more frequent, interagency staff conference calls, interagency meetings, and shared drafting. The dedication and collective efforts of this interagency team deserve our thanks. Under the proposed rule, certain banking entities generally would be prohibited from engaging in proprietary trading. This includes banks, bank holding companies and their affiliates — as well as the U.S. operations of foreign banks and bank holding companies and their affiliates, including affiliated broker-dealers and investment advisers.

In addition, the proposed rule prevents these entities from circumventing this proprietary trading prohibition in that it restricts these entities from sponsoring or investing in hedge funds or private equity funds.

At the same time, the proposed rule — as required by the Dodd-Frank Act — permits certain activities necessary for capital raising and the healthy functioning of our securities markets. These include such things as market-making related activities, risk-mitigating hedging, and underwriting.

These otherwise permitted activities are not permitted, however, if they involve material conflicts of interest, high-risk assets or trading strategies, or if they threaten the safety and soundness of banking institutions or U.S. financial stability.

Although the proposed rule broadly captures all securities and security-based swap dealer accounts, the proposal seeks to strike an appropriate balance between prohibiting proprietary trading and continuing to permit activities that are consistent with normal course market making, risk-mitigating hedging and underwriting.

In addition, the proposed rule implements the Dodd-Frank Act’s prohibition on, as principal, directly or indirectly acquiring and retaining an ownership interest in, or having certain relationships with, a hedge fund or private equity fund.

In developing this proposal, we have considered comments received in response to the Financial Stability Oversight Council’s (FSOC) January 2011 study formalizing the FSOC’s findings and recommendations for implementing Section 619, as well as additional comments we have received. That said, we believe it is important to gain additional information, including empirical data, about the potential impacts the proposed rule will have. We ask a number of questions about such impacts in the proposal, and we look forward to receiving comments.

Before I turn to David Blass of the Division of Trading and Markets to provide a detailed discussion about the staff’s recommendation, I would like to thank Gregg Berman, David Blass, Catherine McGuire, Josephine Tao, Liz Sandoe, David Bloom, Anthony Kelly, Angela Moudy, Daniel Staroselsky, and Nathaniel Stankard from the Division of Trading and Markets for their incredibly hard work on this.

In addition, I would like to thank Robert Plaze, Daniel Kahl, Tram Nguyen, Michael Spratt, and Parisa Haghshenas from the Division of Investment Management for their long hours and hard work devoted to preparing the recommendation before us.

I also would like to thank their colleagues in the Division of Corporation Finance: Paula Dubberly, Amy Starr, Katherine Hsu, John Harrington, and David Beaning. In the Division of Enforcement: Charlotte Buford and Jason Anthony. In the Office of the General Counsel: Meridith Mitchell, Lori Price, Paula Jenson, Sara Cortes, and Jill Felker. And in the Division of Risk, Strategy, and Financial Innovation: Jennifer Marrietta-Westberg, Adam Yonce, Chuck Dale, and Rick Bookstaber.

In addition, I would like to thank our colleagues at the Board, the CFTC, the FDIC, the OCC, and the Department of the Treasury for their collegiality and thoughtful input in working with our staff to develop the proposal before us.

And finally, of course, I would like to thank my colleagues on the Commission and their counsels for their work and comments on the proposal.

I will now ask David to provide us with additional details about the staff’s recommendations.



Modified: 10/12/2011