In response to congressional concerns that the unilateral imposition of the Dodd-Frank Volcker provisions may create a competitive disadvantage for US markets, SEC Chair Mary Schapiro assured the House Financial Services Committee that the SEC would seek extensive comment on the issues of global competitiveness to the extent the Commission can address them in any proposed regulations implementing the Volcker Rule. In testimony before the Committee, Chairman Schapiro acknowledged that the Volcker Rule may have international consequences; and said that the SEC has been in extensive discussions with other regulators about how to address the various issues raised by the Volcker Rule.
Under Section 619 of Dodd-Frank, known as the Volcker Rule, banks and bank holding companies and their affiliates as well as the U.S. operations of foreign banks and foreign bank holding companies and their affiliates, including their affiliated broker-dealers, are generally prohibited from engaging in proprietary trading or sponsoring or investing in a hedge fund or private equity fund. The Volcker Rule includes exceptions for market-making-related activities, risk-mitigating hedging, underwriting, and trading on behalf of customers.
In his opening remarks, Committee Chairman Spencer Bachus (R-Ala) said, now that the rest of the world has rejected the call to impose similar proprietary trading bans, he is concerned about the effect the unilateral application of the Volcker Rule will have on the liquidity and vibrancy of the US capital markets. Chairman Bachus has urged federal financial regulators to interpret the Volcker provisions in a way that does not disadvantage US financial firms. In an earlier letter to the Financial Stability Oversight Council, Chairman Bachus emphasized that any Volcker Rule regulations adopted by US financial regulators must be set against the international regulatory framework so as not to foster regulatory arbitrage and not unfairly impact US financial firms. In the view of Chairman Bachus, the Volcker provisions collide with the European universal banking model that the EU is unlikely to abandon in the spirit of regulatory harmonization.
Chairman Schapiro pointed out that the Financial Stability Oversight Council issued a Dodd-Frank mandated study on the Volcker Rule recommending a supervisory framework for implementing the prohibition on proprietary trading consisting of a programmatic compliance regime, metrics, supervisory review and oversight, and enforcement procedures for violations. For the restrictions on proprietary trading, the study recognized the close relationship between impermissible proprietary trading and other permitted activities, for example, whether the position was taken in anticipation of customer demand or for speculative purposes. The recommended supervisory framework seeks to leverage industry compliance efforts involving data review and metrics analysis with examination and testing by the SEC and other financial regulatory agencies to enforce compliance.
Where a banking entity is permitted to invest in a hedge fund or private equity fund to facilitate customer-related business under the Volcker Rule, the study provided that agencies should consider requirements for banking entities to disclose the nature and amount of any such investment. The FSOC study also sets forth various methods that agencies may use to define “customers” for purposes of the organize/offer exception, factors to consider in determining the scope of funds that will be included in the definition of “hedge fund” and “private equity fund,” and considerations regarding the calculation of a de minimis investment.
Chairman Schapiro noted that the SEC is required to consider the FSOC’s study and coordinate and consult with the federal banking agencies and the CFTC in implementing the Volcker Rule with respect to any entity for which the SEC is the primary financial regulator. The SEC is the primary regulator for registered broker-dealers, registered investment advisers, registered security-based swap dealers, and major security-based swap participants that are affiliates of insured depository institutions.