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US Securities and Exchange Commission

A Month After Banking Agencies Rolled Back Volcker Rule, SEC Is Poised to Act on Its Version to Simplify Requirements

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

***UPDATE (09/16/2019): The SEC on September 16, 2019, abruptly cancelled a meeting scheduled for September 18 to vote on its version of the multi-agency amendments to the Volcker Rule. The SEC did not give a reason for the cancellation, and it is unclear if the meeting will be rescheduled. But under Chairman Jay Clayton’s leadership, the commission has frequently cancelled scheduled open meetings and published rulemaking documents after making the decision in seriatim, which means the commissioners submitted their votes individually.***

By Soyoung Ho

A month after banking supervisors adopted rules to rollback the Volcker Rule, the SEC has finally scheduled a meeting for September 18, 2019, to vote on its version of the multi-agency rule.

Banking agencies on August 20 issued a joint rule that simplifies the requirements of the Volcker Rule, which restricts banks’ proprietary trading and bars them from owning or sponsoring hedge funds or private equity funds.

The revised rule tailors the compliance obligations of banks based on their amount of trading assets and liabilities. The SEC’s version, if adopted, would apply to bank-affiliated broker-dealers, investment advisers, security-based swap dealers, and major security-based swap participants registered with the commission.

The move comes as banks have been unhappy with Section 619 of the 2010 Dodd-Frank financial reform law, which required the SEC, the Federal Reserve, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corp. (FDIC) to adopt the Volcker Rule. The SEC issued its rule in December 2013 in Release No. BHCA-1, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and private Equity Funds. Sec. 619 of PL111-203

Since implementation, banks and industry groups have complained that the Volcker Rule’s restrictions are too complex, impose heavy compliance burdens, and have negative impact on liquidity.

A few years later, with a business-friendly administration under President Donald Trump and Republicans controlling both chambers of Congress, the Economic Growth, Regulatory Relief, and Consumer Protection Act, was signed into law in May 2018. The legislation eased enhanced supervision for banks except for the largest financial institutions and also directed agencies to scale back the Volcker Rule.

In response, the SEC in June 2018 issued Release No. BHCA-3, Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, to propose changes to the Dodd-Frank Act’s Volcker Rule. Sec. 619 of PL111-203

The commission’s final rule will be based on the proposal, which seeks to simplify the regulations and streamline compliance, particularly for smaller banking entities. The proposed revisions leave intact the core principle that banks should not engage in speculative transactions for their own accounts, but it pares back compliance obligations for firms without significant trading portfolios, eliminates the rebuttable presumption that short-term trades are impermissible proprietary trading, and establishes a presumption that underwriting and market-making activities within internal risk limits are permissible.

When banking agencies in August published their rules, Rep. Patrick McHenry, the top Republican on the House Financial Services Committee, applauded their effort.

“I have long advocated for reasonable reform of the Volcker rule—a rule that former Chairman Volcker himself has referred to as being too complicated—and applaud today’s decision by the federal financial regulators,” he said in a statement. “This proposal maintains prohibitions on proprietary trading, but also ensures financial institutions have the ability to make markets.”

However, the chair of the House panel, Democrat Maxine Waters, said that weakening the Volcker Rule will allow banks to gamble with taxpayer money.

“The final rule … would curtail prohibitions in a manner that Congress never intended and allow Wall Street megabanks to gamble with the same types of risky loan securitizations that turned toxic in 2008, at a time when these risky products are once again on the rise,” Waters said. “These actions are clearly intended to carry out the reckless deregulatory agenda of President Trump and his Administration.”


This article originally appeared in the September 13, 2019 edition of Accounting & Compliance Alert. Subscribe to Accounting & Compliance Alert today to get the latest important developments at standard-setting agencies and regulatory organizations, including the SEC, NYSE, NASD, AICPA, PCAOB, FASB, IASB, and the IRS delivered to your inbox daily.

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