SEC Advances Volcker Rule

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;
• 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.