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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Protecting the Financial System and Aligning the Interests of Banks and their Customers


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

SEC Open Meeting
Washington, D.C.
October 12, 2011

In the years leading up to the financial crisis, the largest banks in America came to rely on proprietary trading to generate an ever greater percentage of their revenues.1 The financial crisis subsequently demonstrated how this trading contributed to the banks’ vulnerability, and put the American financial system at risk. As market conditions deteriorated, trading losses increased exponentially and undermined the banks’ capital.2 No one can forget that the banks were rescued from the brink of failure by the commitment of hundreds of billions of taxpayer dollars. Also, as a recent Commission case demonstrated, propriety trading creates the opportunity for banking entities to increase their profits by misusing client trade information.3

To mitigate systemic risk, rein in the speculative activities of banks, and realign the interests of banks with those of their customers, Paul Volcker and many others advocated for new prohibitions. As Paul Volcker explained, “Hedge funds, private equity funds, and trading activities unrelated to customer needs and continuing banking relationships should stand on their own, without the subsidies implied by public support for depository institutions.”4 In response, Congress added Section 619 to the Dodd-Frank Act – popularly known as the “Volcker Rule.”5 This section requires the Commission, the federal banking regulators, and the CFTC to adopt consistent rules to prohibit banking entities6 from engaging in proprietary trading and from owning or sponsoring certain private funds, while permitting specified activities, including market-making, underwriting, and risk-mitigating hedging.7

Crafting a rule to achieve the objectives set by Congress presents a considerable challenge. The statute does not contain an outright ban on all propriety trading – rather it permits certain principal trades while banning others. Giving life to this provision is not easily done and, as reflected in numerous press reports, there are different, and strongly held, views about the approach that should be taken.

I look forward to receiving comments that will enable us to craft a final rule that will meet the objectives of the Dodd-Frank Act.

In closing, I would like to thank the staff for their hard work over many months on this proposal.

1 Sen. Jeff Merkley & Sen. Carl Levin, The Dodd-Frank Act Restrictions on Proprietary Trading and Conflicts of Interest: New Tools to Address Evolving Threats, 48 Harv. J. on Legis. 515, 522 (“Trading revenues at the largest banks had increased from under fifteen percent of net operating revenues in 2004 to nearly thirty percent at the start of the crisis.”).

2 Id. (“[I]n the fourth quarter of 2007 losses from trading almost entirely offset positive net operating revenues from all other sources combined, with trading losses equaling nearly 250 percent of net operating revenue, devastating the capital bases of many firms.”)

3 See, e.g., In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Exchange Act Release No. 63760 (Jan. 25, 2011) (The Commission fined Merrill Lynch $10 million for misusing customer order information and for charging improper mark-ups and mark-downs on riskless principal trades), available at http://sec.gov/litigation/admin/2011/34-63760.pdf.

4 Statement of Paul A. Volcker Before the Committee on Banking, Housing, and Urban Affairs of the United States Senate, at 1-2 (Feb. 2, 2010), available at http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=ec787c56-dbd2-4498-bbbd-ddd23b58c1c4.

5 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 619 (2010).

6 For purposes of the Volcker Rule, a “banking entity” is any insured depository institution, any company that controls a depository institution, any bank holding company, and any affiliate or subsidiary of any of these entities. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 619(h)(1) (2010).

7 With respect to trading as a principal, banking entities may, among other things, engage in underwriting or market-making activities to the extent that these activities do not exceed the reasonably expected near term demands of clients, customers, or counterparties. Banking entities may also engage in risk-mitigating hedging. With respect to sponsoring or investing in private funds, a banking entity may do so only with respect to the provision of bona fide trust, fiduciary, or investment advisory services and only if it holds no more than a de minimus investment in the fund. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 619(d)(1) (2010).



Modified: 10/12/2011