More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
A day after being approved by the FDIC, the Securities and Exchange Commission on Wednesday voted unanimously to advance the proposed rule implementing the Volcker rule, mandated under Section 619 of the Dodd-Frank Act.
SEC Chairman Mary Schapiro said Wednesday that the Volcker rule’s “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, she said, “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 the proposal, which Schapiro said was an “extensive undertaking,” the SEC worked with the Fed, the FDIC, the Office of the Comptroller of the Currency, and eventually the Commodity Futures Trading Commission “to ensure the rule will be applied consistently across institutions." Comments on the proposed rulemaking will be accepted until Jan. 13, 2012; the final rules are scheduled to be implemented by July 2012.
As the SEC explained, Section 619 of the Dodd-Frank Act, among other things, generally prohibits two activities by 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.
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 SEC says.
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;
- 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.