SEC: ADOPTION OF THE VOLCKER RULE

(The following is a reformatted version of a press release
issued by The U.S. Securities and Exchange Commission and
received via electronic mail. The release was confirmed by the
sender.) 
Adoption of the Volcker Rule 
SEC Chair Mary Jo White 
Dec. 10, 2013 
Today, the Commission, acting jointly with our fellow agencies,
adopted a final Volcker Rule designed to significantly reduce
risks to our economy and financial system while preserving the
vitality of the U.S. capital markets. 
The Volcker Rule is central to the framework put in place by the
Dodd-Frank Act to promote the financial stability of the United
States in the wake of the financial crisis.  To carry out the
mandate of Section 619 of the Dodd Frank Act, the final rule
seeks to focus U.S. banks and their affiliates on customer-directed activities, and to prevent the risks to U.S. taxpayers
that can flow from proprietary trading and investments in
private funds.  The final rule has been written to carry out
these objectives while maintaining the strength and flexibility
of the U.S. capital markets by allowing both domestic and
foreign financial firms to continue to participate meaningfully
in those markets where they are permitted to do so. 
It is very important that the agencies charged with the
implementation of the Volcker Rule are acting together in
adopting a single rule under the Bank Holding Company Act that
can be consistently applied and implemented based on continuing
consultation among the agencies.  Market participants, investor
advocates, and others all called for that outcome, which best
achieves the specific - and very critical - statutory objectives
of coordination, consistency, and comparability. 
The final rule is the product of close and extensive
collaboration among the agencies over the two years since the
rule proposal was first issued in October 2011.  It is also the
product of an open, transparent, and exhaustive public
engagement process.  The Commission, like the other agencies,
received and reviewed thousands of comment letters on the
statutory mandate and the proposal.  Commissioners and staff met
frequently with representatives of the various groups that would
be affected by the rule, including those with an interest in
addressing issues related to strengthening the financial
stability of the United States.  Throughout this process, these
groups not only shared their own perspectives, including the
economic considerations supporting those perspectives, but also
responded - through comments and otherwise - to the ideas and
perspectives of others. 
This enormous volume of public input, diverse in both source and
substance, was carefully factored into the many multi-faceted
policy choices presented by this mandate.  The Commission staff
played a critical and constructive role from the outset in
bringing to bear its expertise as a regulator of markets and
market intermediaries.  The staff also applied to the inter-agency process and discussion its deep experience in regulating
asset managers, investment funds, and securitization vehicles. 
In addition, the specialized economic expertise of the
Commission staff was critical in assessing many of the economic
issues and questions posed in public comments and in developing
modifications to the final rule.  Comments on the potential
economic effects of the Volcker Rule were particularly important
in shaping revisions that have produced a more tailored and more
effective final rule.  These comments addressed unintended
consequences and offered alternatives for consideration, and
these views were taken into account in formulating the final
rule. 
A Strong, Balanced Final Rule 
The final rule faithfully and strongly implements the statutory
prohibitions on proprietary trading by U.S. banks and their
affiliates and the limitations on the ability of such entities
to sponsor or invest in hedge funds or private equity funds -
called “covered funds” in the rule.  The deliberative process
leading to today’s joint rule has been informed by a careful
balancing throughout the final rule of the various prudential,
economic, and other factors considered over the last three
years. 
U.S. banks and their affiliates will no longer be able to engage
in short-term proprietary trading of securities, derivatives,
and other financial instruments for their own account.  In
carrying out this prohibition, the final rule has benefited from
a consideration of commenter views on unintended market impacts,
particularly with respect to liquidity in off-exchange markets,
while preserving an appropriate separation between prohibited
proprietary trading and activities permitted by the statute, and
taking meaningful steps to prevent evasion. 
U.S. banks and their affiliates also will be restricted in how
the covered funds they sponsor may be organized and offered.  In
addition, firms that sponsor or advise a covered fund will be
barred from, for example, purchasing assets from the fund or
extending credit to it.  At the same time, the rule preserves
the ability of U.S. banks and their affiliates to engage in
certain activities with covered funds that the statute allows,
such as asset management on behalf of customers. 
Consistent with the statute, the final rule also would limit
otherwise permitted activities if they involve a material
conflict of interest; a material exposure to high-risk assets or
high-risk trading strategies; or a threat to the safety and
soundness of the banking entity or to the financial stability of
the United States. 
Market Making and Underwriting 
The final rule takes a measured, tailored approach to market
making and underwriting activities as statutory exceptions to
the prohibition on proprietary trading.  Permitted market making
activities can include trading in a wide variety of financial
and derivative instruments, including those for which there is
relatively limited liquidity, but only provided the firm is
ready, willing, and able on request to provide quotes and
respond to trading interest on both sides of the market.  While
firms will not be required to justify permitted market making on
a trade-by-trade basis, there are clear requirements regarding
the maintenance and enforcement of risk and inventory limits -
at the trading desk level - that are reasonably and closely tied
to the nature of the instruments traded and to customer and
counterparty demand. 
Similarly, and consistent with the statutory objective,
permitted underwriting activities include the full range of
securities offerings in which underwriters participate, and
encompass the various activities that they commonly undertake to
facilitate distributions.  The rule requires, however, as is the
case for market makers, that the trading desk maintain and
enforce robust risk limits that are tied to the demand from
clients, customers, and counterparties. 
These carefully balanced parameters for essential permitted
activities will help to ensure that market makers and
underwriters can continue to contribute to the liquidity of the
markets and respond to the needs of the marketplace, while
appropriately limiting the financial risks that such activities
may create. 
Trading by Foreign Banks 
The statutory prohibition on proprietary trading does not apply
to all transactions entered into by a foreign bank and their
foreign affiliates.  The final rule will permit these entities
to engage in certain limited proprietary trading activity with
U.S. firms, but only if the risks of such trading activity are
held and managed outside the United States.  Foreign banks will,
for example, be able to conduct cleared transactions through
U.S. exchanges and with unaffiliated, regulated U.S. market
intermediaries.  This approach should help avoid unnecessary
fragmentation of global financial markets and give U.S. markets
access to liquidity from foreign banks, but without frustrating
the fundamental objective of reducing risks to the U.S.
financial system. 
Scope of Covered Funds 
The final rule also fulfills the statutory goal of limiting the
ability of U.S. banks and their affiliates to sponsor or invest
in hedge funds and private equity funds.  The Dodd-Frank Act
defined a “hedge fund” and “private equity fund” by reference to
regulatory exemptions that are commonly used by such funds.  The
proposal carried forward this definition of a “covered fund,”
and included certain commodity pools and foreign funds as well. 
The rule adopted today, drawing on the extensive comments
received, refines and focuses the definition of a “covered
fund.”   The final rule makes clear the exclusion of certain
entities that do not present the same risks as the covered funds
targeted by the statute, including: 
Entities used for general corporate - rather than investment -
purposes, such as wholly-owned subsidiaries, joint ventures, and
acquisition vehicles;
Mutual funds and certain foreign funds that are publicly offered
abroad; and
Vehicles used by banks to conduct loan securitizations as
permitted by the statute.
These exclusions help ensure that U.S. banks and their
affiliates can continue to pursue traditional banking activities
that do not raise the types of risks that the Volcker Rule was
intended to address. 
The Path Forward 
As in any notice-and-comment rulemaking, determining whether to
seek additional comment requires careful judgment, with
attention to both the need to ensure full public participation
and the practical reality that the process must eventually come
to a close.  In my view, the full and extensive dialogue with
the public and among the agencies, as well as the degree of
responsiveness of the final rule to information shared in that
process, makes it unnecessary to seek further comment.  Here,
the interest in finality is heightened by the need to implement
Congress’ mandate and to bring certainty to market participants
awaiting our action. 
The agencies have undertaken a long, deliberative, and
constructive process.  It is critical that we now act in a
uniform manner to advance these important protections for the
U.S. financial system.  Acting now will provide certainty for
markets and market participants and provide firms with the time
necessary to make responsive business decisions and to develop
and implement compliance programs. 
As with any regulatory initiative of this scope and complexity,
the Volcker Rule demands close attention to the nature and pace
of implementation.  The final rule’s reporting and compliance
program requirements will now focus both the regulatory agencies
and firms on implementation.  The staged implementation of the
required reporting of quantitative trading data will allow the
agencies and reporting firms to benefit from early experience to
evaluate whether any modifications are warranted, and what they
should be.  The threshold for reporting has also been adjusted
to help ensure that it will be focused on the largest trading
firms.  Similarly, the compliance program requirements in the
final rule are tiered, based on the consolidated size of the
firms, and the schedule for compliance will be phased in over
time, all in the interest of reducing unnecessary burdens and
costs without compromising the objectives of the rule. 
There is no doubt that, consistent with our experience in other
rulemakings, questions will arise following today’s action, some
of which will require clarification.  We must be alert to both
unintended impacts and regulatory loopholes as we move forward.
The collaborative relationships that have developed during the
rulemaking process should carry forward and allow joint and
coordinated guidance as necessary during the implementation of
the rule.  And, of course, as implementation is completed, we
will be committed to enforcing compliance with the rule. 
Our work, thus, does not end with today’s rule.  We begin a new
phase of monitoring and responsive engagement to ensure that the
Volcker Rule is a strong, workable framework that achieves the
objectives set for us. 
*          *          * 
On a final note, I want to express my great thanks and
admiration, first, for the tireless and extraordinary efforts of
the Commission’s staff over the last several years.  Important
contributions have come from individuals throughout the agency,
who are named on the attachment to my statement. They come from
the Division of Trading and Markets, the Division of Investment
Management, the Division of Economic and Risk Analysis, the
Office of the General Counsel, the Division of Corporation
Finance, and the Office of Compliance, Inspections, and
Examinations, and were joined by colleagues from the Division of
Enforcement, the Office of Municipal Securities, the Office of
the Chief Accountant, and the Office of International Affairs.
I also want to sincerely thank my fellow Commissioners, both
current and former, for their engagement throughout this lengthy
process. 
SEC Staff for the Volcker Rule 
Division of Trading and Markets 
Primary Drafting Team 
John Ramsay
Jim Burns
Catherine McGuire
Gregg Berman
Josephine Tao
Angela Moudy
John Guidroz
Christian Sabella
Tom Eady
Jennifer Palmer
Lisa Skrzycki
Additional Advice and Assistance 
David Blass
Elizabeth Sandoe
Michelle Danis
Haime Workie
Linda Sundberg
Andrew Bernstein
Division of Investment Management 
Primary Drafting Team 
Norm Champ
Diane Blizzard
Danforth Townley
Jane Kim
Brian Johnson
Marian Fowler
Additional Advice and Assistance 
Doug Scheidt
Susan Nash
Keith Carpenter
Edward Rubenstein
Rochelle Plesset
Division of Economic and Risk Analysis 
Craig Lewis
Jennifer Marietta-Westberg
Vanessa Countryman
Adam Yonce
Matthew Kozora
Chuck Dale
Maciej Szefler
Office of General Counsel 
Anne Small
Michael Conley
Meridith Mitchell
Lori Price
William Shirey
Robert Bagnall
Mykaila DeLesDernier
Jill Felker
Cynthia Ginsburg
Maureen Johansen
Robert Teply
Division of Corporation Finance 
Katherine Hsu
Amy Starr
David Beaning
Raquel Fox
Andrew Schoeffler
Sirimal Mukerjee
Karen Ubell
Office of Compliance Inspections and Examinations 
Christine Sibille 
(bjh) NY 
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