On October 12, 2011, the SEC, together with the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), issued proposed regulations implementing Section 619 of the Dodd-Frank Act, popularly referred to as the “Volcker Rule.” Among other things, the Volcker Rule generally (i) prohibits banking entities from engaging in short-term proprietary trading activities; and (ii) limits banking entities from investing in or having certain relationships with a hedge fund or private equity fund.
To implement the Rule, the proposal would require affected entities to develop a robust, comprehensive internal compliance program and to report certain permitted “market-making” trading activities to the appropriate federal supervisory agency. In anticipation of this significantly increased compliance burden, covered entities may want to consider establishing internal controls and procedures to comply with the rule, and begin educating and training staff on the implications and application of the ban on proprietary trading.
The proposal does provide for limited exceptions from the general prohibitions discussed above. For example, banking entities would be permitted to make hedging investments to mitigate risk and would be permitted to organize and make limited investments in a hedge fund or private equity fund, subject to certain de minimus threshold requirements. Banks would nevertheless be prohibited from engaging in these exempted activities if doing so would result in a material conflict of interest, or would expose the bank to high-risk assets or trading strategies.
Comments on the proposal are due by January 13, 2012 and may be submitted using the Commissions’ Internet Comment Form. For additional information about the Volcker Rule and the proposed regulations implementing it, please contact Zac Rosenberg, Associate Attorney by email at firstname.lastname@example.org or by phone at (619) 298-2880.