(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
Statement on the Volcker Rule: Reducing Systemic Risk By Banning
Excessive Proprietary Trading with Depositors’ Money
Commissioner Luis A. Aguilar
Dec. 10, 2013
The recent financial crisis and subsequent events show the
dangers that can result when banks trade for their own accounts
while disregarding their customers’ interests. During the
financial crisis, U.S. taxpayers were forced to cover losses
sustained by major financial institutions that resulted from
speculative proprietary trading activities. While several
factors combined to cause the financial crisis, proprietary
trading by major financial institutions was a key contributor to
that crisis. In particular, proprietary trading by deposit-taking institutions exposed a bank’s capital--and FDIC-insured
deposits--to unacceptable risks and saddled taxpayers with
Moreover, proprietary trading by banks poses investor protection
risks. For example, as highlighted by Senator Merkley and
Senator Levin, banks that engage in proprietary trading may
gather information from their clients’ investment activities and
exploit them. Indeed, banks have, in the past, created and
marketed products that were secretly designed to fail; or
used client trading information against client interests.
Today, the Commission in conjunction with several other
financial regulators implemented Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), also known as the “Volcker Rule,” by adopting an
identical Final Rule. The rule implements a statutory
mandate that prohibits any banking entity from engaging in
proprietary trading or from acquiring or retaining an ownership
interest in, sponsoring, or having certain relationships with a
hedge fund or private equity fund, subject to certain
The Final Rule adopted today prohibits proprietary trading by
banking entities, with certain key exclusions and
exemptions. For example, the rule covers exclusions for
transactions relating to bona fide liquidity management purposes
and exemptions for underwriting, market-making, and hedging
activities. The rule also prohibits banking entities from
acquiring or retaining an ownership interest in, or sponsoring,
a hedge fund or private equity fund, with certain
exemptions. More importantly, the Final Rule states that an
exemption will not be available if the transaction, class of
transactions, or activity would involve a material conflict of
interest, high-risk assets and trading strategies, or pose a
threat to the banking entity or the financial stability of the
United States. The rule also requires banking entities to
develop a compliance program designed to ensure and monitor
compliance with Section 13 of the BHC Act and the Final
Today’s adoption of the Final Rule is an important step, but it
is not the end of the process. The success or failure of the
Volcker Rule will depend on the manner in which banking entities
comply with the letter and spirit of the rule, and on the
willingness of regulators to enforce it. Proactive, strong, and
effective enforcement by the Commission is vital to investor
protection and maintaining the stability of the U.S. financial
system. Section 13(e)(2) of the BHC Act authorizes the
Commission to order any entity subject to its jurisdiction to
terminate activities or investments that violate or function as
an evasion of Section 13 of the Act. In addition, and more
importantly, Section 13(e)(2) of the BHC Act provides that
nothing in Section 13 limits the existing authority of the
I also anticipate that the Commission will continue to work
closely with other regulators. This initiative has truly been a
joint effort and thus, going forward, I would expect continuing
coordination between the Commission and other regulators to
ensure effective implementation and enforcement of the Final
Today’s adoption is a step forward in reining in speculative
risk-taking by banking entities and preventing future crises.
In addition, I note that many industry participants have been
asking for action on this matter --- and to have in place
regulation that can provide certainty. It is hard for any
entity to move forward in an environment of regulatory limbo. I
am hopeful that the industry will move with energy and speed to
comply with the Final Rule.
Although the passage of time can dim memories, we can never
forget the crisis that brought our country to this moment.
Proprietary trading by financial institutions racked up huge
losses and was one of the factors that forced American taxpayers
to bail out the banking system. That crisis destroyed financial
institutions, caused significant investor losses, and
obliterated the household wealth of average Americans. By
reining in excessive proprietary trading by deposit-taking
institutions, the goal of the Volcker Rule is to restore
integrity to the financial system and maintain the vibrancy of
the U.S. financial market.
I want to specifically commend Chair White’s sustained and
effective leadership, perseverance, and tremendous efforts in
shepherding the Volcker Rule through the interagency rulemaking
process. These efforts brought this significant undertaking to
I also appreciate the commitment and professionalism of the SEC
staff and its counterparts at the Office of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, Commodity
Futures Trading Commission, and the United States Department of
Treasury during this process.
[*] The views expressed by Commissioner Luis A. Aguilar are his
own and do not necessarily reflect the views of the U.S.
Securities and Exchange Commission (“Commission” or “SEC”), his
fellow Commissioners, or members of the staff.
 Proprietary trading by financial institutions also caused
massive investor losses after the financial crisis. For
example, in May 2012, JPMorgan disclosed a $2 billion trading
loss, and its shareholders witnessed the obliteration of about
$30 billion of the bank’s market value. See Justin O’Brien and
Olivia Dixon, The Common Link in Failures and Scandals at the
World’s Leading Banks, 36 Seattle U. L. Rev. 941, 945 (Winter
2013). These and other events show that speculative trading by
banks, if left unchecked, can cause serious damage to the U.S.
economy and significant losses to U.S. investors.
 See Onnig H. Dombalagian, The Expressive Synergies of the
Volcker Rule, 54 B.C. L. Rev. 469, 470 (Mar. 2013).
 See id.; Report of the Senate Committee on Banking, Housing,
and Urban Affairs regarding The Restoring American Financial
Stability Act of 2010, S. Rep. No. 111-176 at 9, 92 (2010),
available at http://www.gpo.gov/fdsys/pkg/CRPT-111srpt176/pdf/CRPT-111srpt176.pdf; Testimony by Neal Wolin,
Deputy Secretary of the Treasury, to the Senate Banking
Committee (Feb. 2, 2010) (‘‘Major firms saw their hedge funds
and proprietary trading operations suffer large losses in the
financial crisis. Some of these firms ‘bailed out’ their
troubled hedge funds, depleting the firm’s capital at precisely
the moment it was needed most.”). In fact, due to the financial
crisis, “eight million jobs were lost, more than seven million
homes entered foreclosure, and $13 trillion in American
household wealth vanished.” See, e.g., Report of the Senate
Committee on Banking, Housing, and Urban Affairs regarding The
Restoring American Financial Stability Act of 2010, S. Rep. No.
111-176 at 228 (2010), available at
 See Statement of Thomas M. Hoenig, Vice Chairman FDIC, to
the Committee on House Financial Services, Federal Reserve Bank
and “Too Big To Fail” Banks, 2013 WLNR 15571877, (June 26, 2013)
(“Extending the safety net to broker-dealer activities is
unnecessary and unwise. While trading and investment activities
are important parts of the financial system, they operate more
efficiently and safely without government protections. Keeping
them inside the safety net exposes the FDIC Deposit Insurance
Fund and the taxpayer to loss. Therefore, activities that
should be placed outside the safety net and thus subject to
market forces are: most derivative activities; proprietary
trading; and trading for customer accounts, or market making.
Allowing customer trading makes it easy to game the system by
‘concealing’ proprietary trading as part of it.”); Thomas M.
Hoenig and Charles S. Morris, Restructuring the Banking System
to Improve Safety and Soundness, pp. 21-22 (Dec. 2012)
(Proprietary trading has “little in common with core banking
services and create risks that are difficult to assess, monitor,
and control.”), available at
 Sen. Jeff Merkley and Sen. Carl Levin, The Dodd-Frank Act
Restrictions on Proprietary Trading and Conflicts of Interest:
New Tools to Address Evolving Threats, 48 Harv. J. on Legis.
515, 522-23 (Summer 2011).
 Id. at 523-25.
 See, e.g., In the Matter of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Exchange Act Release No. 63760 (Jan. 25,
2011) (The Commission fined Merrill Lynch $10 million for
misusing customer order information and for charging improper
mark-ups and mark-downs on riskless principal trades), available
 These regulators are the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, and the Commodity
Futures Trading Commission.
 Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203 (2010).
 See Section 619 of the Dodd-Frank Act added new section 13
to the Bank Holding Company Act of 1956 (“BHC Act”) (codified at
12 U.S.C. 1851), which generally prohibits any banking entity
from engaging in proprietary trading or from acquiring or
retaining an ownership interest in, sponsoring, or having
certain relationships with a hedge fund or private equity fund,
subject to certain exemptions.
 See 12 U.S.C. 1851.
 These exclusions include transactions in financial
instruments under certain repurchase and reverse repurchase
agreements and securities lending arrangements, securities
acquired for bona fide liquidity management purposes, and
transactions by a clearing agency or derivatives clearing
organization in connection with clearing activities. (Section
__.3 of the Final Rule) Moreover, the Final Rule permits a
banking entity to engage in underwriting (Section __.4(a) of the
Final Rule); market making-related activities (Section __.4(b)
of the Final Rule); risk-mitigating hedging (Section __.5 of the
Final Rule); trading in certain government obligations (Section
__.6 of the Final Rule); trading on behalf of customers (Section
__.6 of the Final Rule); trading by an insurance company for its
general account (Section __.6 of the Final Rule); and trading
solely outside of the U.S. by foreign banking entities (Section
__.6 of the Final Rule). The underwriting, market-making, and
hedging exemptions prohibit compensation designed to reward or
incentivize prohibited proprietary trading (Sections __.4 and
__.5 of the Final Rule).
Section 13(d)(1)(H) of the BHC Act permits certain foreign
banking entities to engage in proprietary trading that occurs
solely outside of the United States and the Final Rule does not
prevent a foreign banking entity from trading with any U.S.
counterparty under that exemption. The Final Rule focuses on
the location of the principal risk of a foreign banking entity’s
transactions but requires that decisions to enter into trades be
made outside the United States. (Section __.6(e) of the Final
 Section __.10 of the Final Rule. The Final Rule, however,
provides exemptions that permit a banking entity to acquire or
retain an ownership in, or to sponsor, a covered fund in
connection with underwriting or market making-related activities
(Section __.11 of the Final Rule); risk-mitigating hedging
activities (Section __.13 of the Final Rule); activities on
behalf of customers (Section __.10 of the Final Rule);
investments in small business investment companies and certain
other investments designed to promote the public welfare
(Section __.11 of the Final Rule); an insurance company acting
for its general account (Section __.13 of the Final Rule);
organizing and offering a covered fund (Section __.11 of the
Final Rule); and covered fund activities that occur solely
outside of the United States (Section __.13 of the Final Rule).
 Sections __.7 and __.15 of the Final Rule. The Final Rule
does not require banking agencies to provide written disclosures
addressing potential conflicts of interest; however, at my
request, the Final Rule now includes language stating that
written disclosures may be appropriate in certain circumstances.
 Section __.20 of the Final Rule.
 Section __.21 of the Final Rule implements Section 13(e)(2)
of the BHC Act.
 The SEC may rely on its inherent authority under applicable
provisions of the federal securities laws to bring enforcement
actions against entities that are subject to the Final Rule,
including their officers, directors, and other affiliated
parties for violations of law. In particular, Section 13 of the
BHC Act and the Final Rule do not limit the reach or
applicability of the antifraud and other provisions of the
federal securities laws--such as Section 17(a) of the Securities
Act of 1933 or Sections 10(b) and 15(c) of the Securities
Exchange Act of 1934--to banking entities. Moreover, nothing in
the Final Rule limits the SEC’s inherent examination and
inspection authority over SEC-registered entities to ensure
compliance with the Final Rule.
The Final Rule also requires the CEO of a banking entity to
attest annually in writing to its regulator that the banking
entity has in place a program reasonably designed to ensure
compliance with the requirements of Section 13 of the BHC Act
and the Final rule. See Section __.20 and Appendix B of the
Final Rule. This requirement incentivizes the creation of
appropriate “tone from the top” compliance programs, encourages
management to adopt a culture of compliance, and ensures
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