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U.S. Securities and Exchange Commission

SEC Jointly Proposes Prohibitions and Restrictions on Proprietary Trading


Washington, D.C., Oct. 12, 2011 - The Securities and Exchange Commission today voted to propose a rule implementing the so-called "Volcker Rule" requirements. The requirements stem from Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC is issuing the proposal jointly with the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

"This proposal is intended to curb the proprietary trading of commercial banks and their affiliates in order to protect taxpayers and consumers by prohibiting insured depository institutions from engaging in risky proprietary trading," said SEC Chairman Mary L. Schapiro.

Public comments on the joint proposal should be submitted by Jan. 13, 2012.

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Section 619 of the Dodd-Frank Act, among other things, generally prohibits two activities of banking entities.

  • It prohibits federally insured depository institutions and their affiliates (banking entities) from engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity’s own account.
  • It prohibits owning, sponsoring, or having certain relationships with a hedge fund or private equity fund.

To implement Section 619, the SEC is considering – along with other financial regulators – a proposal that would clarify the scope of the section’s prohibitions and, consistent with statutory authority, provide certain exemptions.

The Proposal

Under the proposed rule, banking entities would be required to establish an internal compliance program subject to supervisory oversight and designed to ensure and monitor compliance with the prohibitions and restrictions of Section 619.

The proposal also would require firms with significant trading operations to report to the appropriate federal supervisory agency certain quantitative measurements designed to assist the supervisory agency and banking entities in identifying prohibited proprietary trading from permitted activities.

At the same time, the proposal would exempt transactions in certain instruments from the prohibition on proprietary trading, including obligations of:

  • The U.S. government or a U.S. government agency
  • The government-sponsored enterprises
  • State and local governments

Additionally, the proposal would exempt activities such as:

  • Market making
  • Underwriting
  • Risk-mitigating hedging

Notwithstanding the general prohibition on investments in and certain relationships with hedge funds and private equity funds, the statute contains several exemptions. The proposal, for example, would exempt:

  • Organizing and offering a hedge fund or private equity funds under certain conditions, including limiting investments in such funds to a de minimus amount.
  • Making risk-mitigating hedging investments.
  • Making investments in certain non-U.S. funds.

The jointly-proposed rule includes regulatory commentary intended to assist banking entities in distinguishing permitted market making-related activities from prohibited proprietary trading activities, and in identifying permitted activities in hedge funds and private equity funds. It also includes a number of elements intended to reduce the effect of the proposal on smaller, less-complex banking entities. For example, the proposal limits the extent to which smaller banking entities are required to report quantitative measurements.

What’s Next

Comments on the proposal should be submitted by Jan. 13, 2012.

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Modified: 10/12/2011