SEC Proposes Volker Rule

By Cydney Posner

At an open meeting this morning, the SEC (with only four commissioners, as the new nominee to replace Kathleen Casey has not yet been approved) voted to propose a version of the Volker rule, a new rule under Section 619 of Dodd-Frank that would generally prohibit any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions. The rules are being jointly proposed by the Federal Reserve, FDIC, Office of the Comptroller of the Currency and the CFTC. The proposal is designed to strike a balance that prohibits risky proprietary trading that threatens the stability of the entire financial system without unduly restricting normal bank activities, such as market-making, underwriting and risk-mitigating hedging. To prevent banks from indirectly engaging in proprietary trading, banks and their affiliates (including their investment advisers) would be prohibited from investing more than a specified amount in or sponsoring certain private funds. Although he voted in favor of issuing the proposal for public comment, Commissioner Paredes expressed serious reservations about the proposal, including its potential to curtail market-making and underwriting (thus impairing capital formation), the possibility that it extraterritorial reach would put U.S. banks at a competitive disadvantage internationally, its excessive compliance costs and its failure to clearly exclude venture capital funds from the definitions of hedge funds and private equity funds.

The SEC also voted to propose new rules under Section 764(a) of Dodd-Frank to provide for the registration of security-based swap dealers and major security-based swap participants.

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