The Volcker Rule
International Association of
Risk and Compliance Professionals (IARCP)
More
about the Dodd-Frank Act will be found at:
www.dodd-frank-act.us
Section 619 of the
Dodd-Frank Act is called
the “Volcker Rule”.
The Volcker Rule is a revised
version of an amendment introduced by Senators Merkley (D–OR) and
Levin (D–MI). It takes the form of:
A. A new Section 13 of the Bank
Holding Company Act of 1956 and
B. A new Section 27B of the Securities Act of 1933.
The House-Senate Conference Agrees on Final
Volcker Rule
June 27, 2010
SEC. 619. PROHIBITIONS ON PROPRIETARY TRADING AND CERTAIN
RELATIONSHIPS WITH HEDGE FUNDS AND PRIVATE EQUITY FUNDS.
The Bank Holding Company Act of
1956 (12 U.S.C.1841 et seq.) is amended by
adding at the end the following:
‘‘SEC. 13. PROHIBITIONS ON PROPRIETARY
TRADING AND CERTAIN RELATIONSHIPS WITH HEDGE FUNDS AND PRIVATE
EQUITY FUNDS.
‘‘(a) IN GENERAL.—
‘‘(1) PROHIBITION.—
Unless otherwise provided in this section, a
banking entity shall not—
‘‘(A) engage in
proprietary trading; or
‘‘(B) acquire or retain any equity, partnership, or other
ownership interest in or sponsor a hedge fund or a private equity
fund.
‘‘(2) NONBANK FINANCIAL
COMPANIES SUPERVISED BY THE BOARD.—
Any nonbank financial company
supervised by the Board that engages in
proprietary trading or takes or retains any equity, partnership,
or other ownership interest in or sponsors a hedge fund or
a private equity fund shall be subject, by
rule, as provided in subsection (b)(2), to
additional capital requirements for
and additional quantitative limits with regards to such
proprietary trading and taking or retaining any equity,
partnership, or other ownership interest in or sponsorship of a
hedge fund or a private equity fund, except
that permitted activities as described in subsection (d)
shall
not be subject to the additional capital and additional
quantitative limits except as provided in subsection (d)(3), as if
the nonbank financial company supervised by the Board were a
banking entity.
‘‘(b) STUDY AND RULEMAKING.—
‘‘(1)
STUDY.—
Not later than 6 months after the
date of enactment of this section, the
Financial Stability Oversight Council shall
study and make recommendations on
implementing the provisions of this section so as to—
‘‘(A) promote and enhance the safety and soundness of banking
entities;
‘‘(B) protect taxpayers and
consumers and enhance financial stability by minimizing the
risk that insured depository institutions and the affiliates of
insured depository institutions will engage in unsafe and unsound
activities;
‘‘(C) limit the inappropriate transfer
of Federal subsidies from institutions that benefit from
deposit insurance and liquidity facilities of the Federal
Government to unregulated entities;
‘‘(D) reduce conflicts of interest
between the self-interest of banking entities and nonbank
financial companies supervised by the Board, and the interests of
the customers of such entities and companies;
‘‘(E) limit activities that have caused
undue risk or loss in banking entities and nonbank
financial companies supervised by the Board, or that might
reasonably be expected to create undue risk or loss in such
banking entities and nonbank financial companies supervised by the
Board;
‘‘(F) appropriately accommodate the
business of insurance within an insurance company, subject
to regulation in accordance with the relevant insurance company
investment laws, while protecting the safety and soundness of any
banking entity with which such insurance company is affiliated and
of the United States financial system; and
‘‘(G) appropriately time the divestiture of illiquid assets
that are affected by the implementation of the prohibitions under
subsection(a).
‘‘(2) RULEMAKING.—
‘‘(A) IN GENERAL.—
Unless otherwise provided in this section,
not later than 9 months after the completion of the study
under paragraph (1), the appropriate Federal
banking agencies, the Securities and Exchange Commission, and the
Commodity Futures Trading Commission, shall consider the findings
of the study under paragraph (1) and
adopt rules to carry out this section, as provided in subparagraph
(B).
‘‘(B) COORDINATED
RULEMAKING.—
‘‘(i) REGULATORY AUTHORITY.—
The regulations issued under this paragraph shall be issued by—
‘‘(I) the appropriate Federal banking
agencies, jointly, with respect to insured depository
institutions;
‘‘(II) the Board, with respect to
any company that controls an insured depository institution, or
that is treated as a bank holding company for purposes of section
8 of the International Banking Act, any nonbank financial company
supervised by the Board, and any subsidiary of any of the
foregoing (other than a subsidiary for which an agency described
in subclause (I), (III), or (IV) is the primary financial
regulatory agency);
‘‘(III) the Commodity Futures Trading
Commission, with respect to any entity for which the
Commodity Futures Trading Commission is the primary financial
regulatory agency, as defined in section 2 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act; and
‘‘(IV) the Securities and Exchange
Commission, with respect to any entity for which the
Securities and Exchange Commission is the primary financial
regulatory agency, as defined in section 2 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
‘‘(ii) COORDINATION, CONSISTENCY,
AND COMPARABILITY.—
In developing and issuing regulations pursuant to this section,
the appropriate Federal banking agencies, the Securities and
Exchange Commission, and the Commodity Futures Trading Commission
shall consult and coordinate with each
other, as appropriate, for the purposes of assuring, to the
extent possible, that such regulations are comparable and provide
for consistent application and implementation of the applicable
provisions of this section to avoid providing
advantages or
imposing disadvantages to the companies affected by this
subsection and to protect the safety and soundness of banking
entities and nonbank financial companies supervised by the Board.
‘‘(iii) COUNCIL ROLE.—
The Chairperson of the Financial Stability
Oversight Council shall be
responsible for coordination of the regulations issued under this
section.
‘‘(c) EFFECTIVE DATE.—
‘‘(1)
IN GENERAL.—
Except as provided in paragraphs (2) and (3), this section shall
take effect on the earlier of—
‘‘(A) 12 months after the date of the issuance of final rules
under subsection (b); or
‘‘(B) 2 years after the date of enactment of this section.
‘‘(2) CONFORMANCE PERIOD FOR
DIVESTITURE.—
A banking entity or nonbank financial company supervised by the
Board shall bring its activities and
investments into compliance with the requirements of this section
not later than 2 years after the date on which the requirements
become effective pursuant to this section
or 2 years after the date on which the
entity or company becomes a nonbank financial company supervised
by the Board.
The Board may, by rule or order, extend
this two year period for not more than one year at a time, if, in
the judgment of the Board, such an extension is consistent with
the purposes of this section and would not be detrimental to the
public interest.
The extensions made by the Board under the preceding sentence may
not exceed an aggregate of 3 years.
‘‘(3) EXTENDED TRANSITION FOR
ILLIQUID FUNDS.—
‘‘(A) APPLICATION.—
The Board may, upon the application of a banking entity,
extend the period during which the banking
entity, to the extent necessary to fulfill a contractual
obligation that was in effect on May 1,
2010, may take or retain its equity, partnership, or other
ownership interest in, or otherwise provide additional capital to,
an illiquid fund.
‘‘(B) TIME LIMIT ON APPROVAL.—
The Board may grant extension under subparagraph (A), which
may not exceed 5 years.
‘‘(4) DIVESTITURE REQUIRED.—
Except as otherwise provided in subsection (d)(1)(G),
a banking entity may not engage in any
activity prohibited under subsection (a)(1)(B) after the
earlier of—
‘‘(A) the date on which the contractual obligation to invest
in the illiquid fund terminates; and
‘‘(B) the date on which any extensions granted by the Board
under paragraph (3) expire.
‘‘(5) ADDITIONAL CAPITAL DURING
TRANSITION PERIOD.—
Notwithstanding paragraph (2), on the date on which the Commission
issues rules under subsection (b)(2) the appropriate Federal
banking agencies, the Securities and Exchange Commission, and the
Commodity Futures Trading Commission shall issue rules, as
provided in subsection (b)(2), to impose additional capital
requirements, and any other restrictions, as appropriate, on
any equity, partnership, or ownership interest in or sponsorship
of a hedge fund or private equity fund by a banking entity.
‘‘(6) SPECIAL RULEMAKING.—
Not later than months after the date of enactment of this
section, the Board shall issues rules to implement paragraph
(2) and (3).
‘‘(d) PERMITTED ACTIVITIES.—
‘‘(1) IN GENERAL.—
Notwithstanding the restrictions under subsection (a), to the
extent permitted by any other provision of Federal or State
law, and subject to the limitations under paragraph (2) and any
restrictions or limitations that the appropriate Federal banking
agencies, the Securities and Exchange Commission, and the
Commodity Futures Trading Commission, may
determine, the following activities (in this section referred to
as ‘permitted activities’) are permitted:
‘‘(A) The purchase, sale, acquisition,
or disposition of obligations of the United States or any
agency thereof, obligations, participations, or other instruments
of or issued by the Government National Mortgage Association, the
Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, a Federal Home Loan Bank, the Federal
Agricultural Mortgage Corporation, or a Farm Credit System
institution chartered under and subject to the provisions of the
Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.), and obligations
of any State or of any political subdivision thereof.
‘‘(B) The purchase, sale, acquisition,
or disposition of securities and other instruments
described in subsection (h)(4) in connection with underwriting or
market-making-related activities, to the extent that any such
activities permitted by this subparagraph are designed not to
exceed the reasonably expected near term demands of clients,
customers, or counterparties.
‘‘(C) Risk-mitigating hedging activities
in connection with and related to individual or aggregated
positions, contracts, or other holdings of the banking entity that
are designed to reduce the specific risks to a banking entity in
connection with and related to such positions, contracts, or other
holdings.
‘‘(D) The purchase, sale, acquisition,
or disposition of securities and other instruments described in
subsection (h)(4) on behalf of customers.
‘‘(E) Investments in one or more small
business investment companies, as defined in section 102 of
the Small Business Investment Act of 1958 (15 U.S.C. 662),
investments designed primarily to promote the public welfare, of
the type permitted under paragraph (11) of section 5136 of the
Revised Statutes of the United States (12 U.S.C. 24), or
investments that are qualified rehabilitation expenditures with
respect to a qualified rehabilitated building or certified
historic structure, as such terms are defined in section 47 of the
Internal Revenue Code of 1986 or a similar State historic tax
credit program.
‘‘(F) The purchase, sale, acquisition,
or disposition of securities and other instruments
described in subsection (h)(4) by a regulated insurance company
directly engaged in the business of insurance for the general
account of the company and by any affiliate of such regulated
insurance company, provided that such activities by any affiliate
are solely for the general account of the regulated insurance
company, if—
‘‘(i) The purchase, sale, acquisition,
or disposition is conducted in compliance with, and subject
to, the insurance company investment laws, regulations, and
written guidance of the State or jurisdiction in which each such
insurance company is domiciled; and
‘‘(ii) The appropriate Federal banking agencies, after
consultation with the Financial Stability Oversight Council and
the relevant insurance commissioners of the States and
territories of the United States, have not jointly determined,
after notice and comment, that a particular
law, regulation, or written guidance described in clause (i) is
insufficient to protect the safety and soundness of the banking
entity, or of the financial stability of the United States.
‘‘(G) Organizing and offering a private
equity or hedge fund, including serving as a general
partner, managing member, or trustee of the fund and in any manner
selecting or controlling (or having employees, officers,
directors, or agents who constitute) a majority of the directors,
trustees, or management of the fund, including any necessary
expenses for the foregoing, only if—
‘‘(i) the banking entity provides bona
fide trust, fiduciary, or investment advisory services;
‘‘(ii) the fund is organized and offered
only in connection with the provision of bona fide trust,
fiduciary, or investment advisory services and only to persons
that are customers of such services of the banking entity;
‘‘(iii) the banking entity does not
acquire or retain an equity interest, partnership interest, or
other ownership interest in the funds except for a de minimis
investment subject to and in compliance with paragraph (4);
‘‘(iv) the banking entity complies with
the restrictions under paragraphs (1) and (2) of subparagraph (f);
‘‘(v) the banking entity does not,
directly or indirectly, guarantee, assume, or otherwise insure the
obligations or performance of the hedge fund or private equity
fund or of any hedge fund or private equity fund in which such
hedge fund or private equity fund invests;
‘‘(vi) the banking entity does not share
with the hedge fund or private equity fund, for corporate,
marketing, promotional, or other purposes, the same name or a
variation of the same name;
‘‘(vii) no director or employee
of the banking entity takes or retains an equity interest,
partnership interest, or other ownership interest in the hedge
fund or private equity fund, except for any director or employee
of the banking entity who is directly engaged in providing
investment advisory or other services to the hedge fund or private
equity fund; and
‘‘(viii) the banking entity discloses to
prospective and actual investors in the fund, in writing,
that any losses in such hedge fund or private equity fund are
borne solely by investors in the fund and not by the banking
entity, and otherwise complies with any additional rules of the
appropriate Federal banking agencies, the Securities and Exchange
Commission, or the Commodity Futures Trading Commission, as
provided in subsection (b)(2), designed to ensure that losses in
such hedge fund or private equity fund are borne solely by
investors in the fund and not by the banking entity.
‘‘(H) Proprietary trading
conducted by a banking entity pursuant to paragraph (9) or (13) of
section 4(c), provided that the trading occurs solely outside of
the United States and that the banking entity is not directly or
indirectly controlled by a banking entity that is organized under
the laws of the United States or of one or more States.
‘‘(I) The acquisition or retention of
any equity, partnership, or other ownership interest in, or the
sponsorship of, a hedge fund or a private equity fund by a
banking entity pursuant to paragraph (9) or (13) of section 4(c)
solely outside of the United States, provided that no ownership
interest in such hedge fund or private equity fund is offered for
sale or sold to a resident of the United States and that the
banking entity is not directly or indirectly controlled by a
banking entity that is organized under the laws of the United
States or of one or more States.
‘‘(J) Such other activity as the
appropriate Federal banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading Commission
determine, by rule, as provided in subsection (b)(2), would
promote and protect the safety and soundness of the banking entity
and the financial stability of the United States.
‘‘(2) LIMITATION ON PERMITTED
ACTIVITIES.—
‘‘(A) IN GENERAL.—
No transaction, class of transactions, or
activity may be deemed a permitted activity under paragraph
(1) if the transaction, class of
transactions, or activity—
‘‘(i) would involve or result in a
material conflict of interest (as such term shall be
defined by rule as provided in subsection (b)(2)) between the
banking entity and its clients, customers, or counterparties;
‘‘(ii) would result, directly or
indirectly, in a material exposure by the banking entity to
high-risk assets or high-risk trading strategies (as such terms
shall be defined by rule as provided in subsection (b)(2));
‘‘(iii) would pose a threat to the
safety and soundness of such banking entity; or
‘‘(iv) would pose a threat to the
financial stability of the United States.
‘‘(B) RULEMAKING.—
The appropriate Federal banking agencies, the Securities and
Exchange Commission, and the Commodity Futures Trading Commission
shall issue regulations to implement subparagraph (A), as part of
the regulations issued under subsection (b)(2).
‘‘(3) CAPITAL AND QUANTITATIVE
LIMITATIONS.—
The appropriate Federal banking agencies, the Securities and
Exchange Commission, and the Commodity Futures Trading Commission
shall, as provided in subsection (b)(2),
adopt rules imposing additional capital requirements and
quantitative limitations, including diversification requirements,
regarding the activities permitted under this section if the
appropriate Federal banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading Commission determine
that additional capital and quantitative limitations are
appropriate to protect the safety and soundness of banking
entities engaged in such activities.
‘‘(4) DE MINIMIS INVESTMENT.—
‘‘(A) IN GENERAL.—
A banking entity may make and retain an
investment in a hedge fund or private equity fund that the
banking entity organizes and offers, subject to the limitations
and restrictions in subparagraph (B) for the purposes of—
‘‘(i) establishing the fund and providing the fund with
sufficient initial equity for investment to permit the fund to
attract unaffiliated investors; or
‘‘(ii) making a de minimis investment.
‘‘(B) LIMITATIONS AND RESTRICTIONS
ON INVESTMENTS.—
‘‘(i) REQUIREMENT TO SEEK OTHER INVESTORS.—
A banking entity shall actively seek unaffiliated investors to
reduce or dilute the investment of the banking entity to the
amount permitted under clause (ii).
‘‘(ii)
LIMITATIONS ON SIZE OF INVESTMENTS.—
Notwithstanding any other provision of law, investments by a
banking entity in a hedge fund or private equity fund shall—
‘‘(I) not later than 1 year after the
date of establishment of the fund, be reduced through redemption,
sale, or dilution to an amount that is not more than 3 percent of
the total ownership interests of the fund;
‘‘(II) be immaterial to the banking entity, as defined, by
rule, pursuant to subsection (b)(2), but in no case may the
aggregate of all of the interests of the banking entity in all
such funds exceed 3 percent of the Tier 1 capital of the banking
entity.
‘‘(iii) CAPITAL.—
For purposes of determining compliance with applicable capital
standards under paragraph (3), the aggregate
amount of the outstanding investments by a banking entity under
this paragraph, including retained earnings, shall be deducted
from the assets and tangible equity of the banking entity, and the
amount of the deduction shall increase commensurate with the
leverage of the hedge fund or private equity fund.
‘‘(C) EXTENSION.—
Upon an application by a banking entity, the Board may extend the
period of time to meet the requirements under subparagraph
(B)(i)(I) for 2 additional years, if
the Board finds that an extension would be consistent with safety
and soundness and in the public interest.
‘‘(e)
ANTI-EVASION.—
‘‘(1) RULEMAKING.—
The appropriate Federal banking agencies, the Securities and
Exchange Commission, and the Commodity Futures Trading Commission
shall issue regulations, as part of the rule making provided for
in subsection (b)(2), regarding internal controls and
recordkeeping, in order to insure compliance with this section.
‘‘(2)
TERMINATION OF ACTIVITIES OR INVESTMENT.—
Notwithstanding any other provision of law, whenever an
appropriate Federal banking agency, the Securities and Exchange
Commission, or the Commodity Futures Trading Commission, as
appropriate, has reasonable cause to believe
that a banking entity or nonbank financial company supervised by
the Board under the respective agency’s jurisdiction has made an
investment or engaged in an activity in a manner that functions as
an evasion of the requirements of this section (including
through an abuse of any permitted activity)
or otherwise violates the restrictions under this section,
the appropriate Federal banking agency, the Securities and
Exchange Commission, or the Commodity Futures Trading Commission,
as appropriate, shall order, after due notice and opportunity for
hearing, the banking entity or nonbank financial company
supervised by the Board to terminate the activity and, as
relevant, dispose of the investment. Nothing in this paragraph
shall be construed to limit the inherent authority of any Federal
agency or State regulatory authority to further restrict any
investments or activities under otherwise applicable provisions of
law.
‘‘(f) LIMITATIONS ON RELATIONSHIPS
WITH HEDGE
FUNDS AND PRIVATE EQUITY FUNDS.—
‘‘(1) IN
GENERAL.—
No banking entity that serves, directly or indirectly, as the
investment man ager, investment adviser, or sponsor to a hedge
fund or private equity fund, or that organizes and offers a hedge
fund or private equity fund pursuant to paragraph (d)(1)(G),
and no affiliate of such entity, may enter
into a transaction with the fund, or with any other hedge
fund or private equity fund that is controlled by such fund, that
would be a covered transaction, as defined in section 23A of the
Federal Reserve Act (12 U.S.C. 371c), with the hedge fund or
private equity fund, as if such banking entity and the
affiliate thereof were a member bank and the hedge fund or private
equity fund were an affiliate thereof.
‘‘(2) TREATMENT AS MEMBER BANK.—
A banking entity that serves, directly or indirectly, as the
investment manager or investment adviser to a hedge fund or
private equity fund, or that organizes and offers a hedge fund or
private equity fund pursuant to paragraph (d)(1)(G), shall be
subject to section 23B of the Federal Reserve Act (12
U.S.C.371c–1), as if such banking entity were a member bank and
such hedge fund or private equity fund were an affiliate thereof.
‘‘(3) PERMITTED
SERVICES.—
‘‘(A) IN GENERAL.—
Notwithstanding paragraph (1), the Board may
permit a banking entity or nonbank financial company
supervised by the Board to enter into any prime brokerage
transaction with any hedge fund or private equity fund in which a
hedge fund or private equity fund managed, sponsored, or advised
by such banking entity or nonbank financial company supervised by
the Board has taken an equity, partnership, or other ownership
interest, if—
‘‘(i) the banking entity or nonbank financial company
supervised by the Board is in compliance
with each of the limitations set forth in subsection
(d)(1)(G) with regard to a hedge fund or private equity fund
organized and offered by such banking entity or nonbank financial
company supervised by the Board;
‘‘(ii) the chief executive officer (or equivalent officer) of
the banking entity certifies in writing annually (with a duty to
update the certification if the information in the certification
materially changes) that the conditions specified in subsection
(d)(1)(g)(v) are satisfied;
‘‘(iii) the Board has determined that
such transaction is consistent with the safe and sound
operation and condition of the banking entity or nonbank financial
company supervised by the Board.
‘‘(B) TREATMENT OF PRIME BROKERAGE
TRANSACTIONS.—
For purposes of subparagraph (A), a prime brokerage transaction
described in subparagraph (A) shall be subject to section 23B of
the Federal Reserve Act (12 U.S.C. 371c-1) as if the counterparty
were an affiliate of the banking entity.
‘‘(4) APPLICATION TO NONBANK
FINANCIAL COMPANIES SUPERVISED BY THE BOARD.—
The appropriate Federal banking agencies, the Securities and
Exchange Commission, and the Commodity Futures Trading Commission
shall adopt rules, as provided in subsection (b)(2), imposing
additional capital charges or other
restrictions for nonbank financial companies supervised by the
Board to address the risks to and conflicts of interest of banking
entities described in paragraphs (1), (2), and (3) of this
subsection.
‘‘(g) RULES OF
CONSTRUCTION.—
‘‘(1) LIMITATION ON CONTRARY AUTHORITY.—
Except as provided in this section, notwithstanding any other
provision of law, the prohibitions and restrictions under this
section shall apply to activities of a
banking entity or nonbank financial company supervised by
the Board, even if such activities are authorized for a banking
entity or nonbank financial company supervised by the Board.
‘‘(2) SALE OR SECURITIZATION OF
LOANS.—
Nothing in this section shall be construed to limit or
restrict the ability of a banking entity or nonbank financial
company supervised by the Board to sell or securitize loans in a
manner otherwise permitted by law.
‘‘(3) AUTHORITY
OF FEDERAL AGENCIES AND
STATE REGULATORY AUTHORITIES.—
Nothing in this section shall be construed to limit the inherent
authority of any Federal agency or State regulatory authority
under otherwise applicable provisions of law.
‘‘(h) DEFINITIONS.—
In this section, the following definitions
shall apply:
‘‘(1) BANKING ENTITY.—
The term ‘banking entity’ means any insured depository institution
(as defined in section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813)), any company that controls an insured depository
institution, or that is treated as a bank holding company for
purposes of section 8 of the International Banking Act of 1978,
and any affiliate or subsidiary of any such entity.
For purposes of this paragraph, the term ‘insured depository
institution’ does not include an institution that functions solely
in a trust or fiduciary capacity, if—
‘‘(A) all or substantially all of the deposits of such
institution are in trust funds and are received in a bona fide
fiduciary capacity;
‘‘(B) no deposits of such institution which are insured by the
Federal Deposit Insurance Corporation are offered or marketed by
or through an affiliate of such institution;
‘‘(C) such institution does not accept demand deposits or
deposits that the depositor may withdraw by check or similar means
for payment to third parties or others or make commercial loans;
and
‘‘(D) such institution does not—
‘‘(i) obtain payment or payment related services from any
Federal Reserve bank, including any service referred to in
section 11(a) of the Federal Reserve Act (12 U.S.C. 248a); or
‘‘(ii) exercise discount or borrowing privileges pursuant to
section 19(b)(7) of the Federal Reserve Act (12 U.S.C.
461(b)(7)).
‘‘(2) HEDGE FUND; PRIVATE EQUITY FUND.—
The terms ‘hedge fund’ and ‘private
equity fund’ mean an issuer that would be an investment company,
as defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1
et seq.), but for section 3(c)(1) or 3(c)(7) of that Act, or such
similar funds as the appropriate Federal banking agencies, the
Securities and Exchange Commission, and the Commodity Futures
Trading Commission may, by rule, as provided in subsection (b)(2),
determine.
‘‘(3) NONBANK FINANCIAL COMPANY
SUPER VISED BY THE BOARD.—
The term ‘nonbank financial company supervised by the Board’ means
a nonbank financial company
supervised by the Board of Governors, as defined in
section 102 of the Financial Stability Act of 2010.
‘‘(4)
PROPRIETARY TRADING.—
The term ‘proprietary trading’, when
used with respect to a banking entity or nonbank financial company
supervised by the Board, means engaging as a principal for the
trading account of the banking entity or nonbank financial company
supervised by the Board in any transaction to purchase or sell, or
otherwise acquire or dispose of, any security, any derivative, any
contract of sale of a commodity for future delivery, any option on
any such security, derivative, or contract, or any other security
or financial instrument that the appropriate Federal banking
agencies, the Securities and Exchange Commission, and the
Commodity Futures Trading Commission may, by rule as provided in
subsection (b)(2), determine.
‘‘(5) SPONSOR.—
The term to ‘sponsor’ a fund means—
‘‘(A) to serve as a general partner, managing member, or
trustee of a fund;
‘‘(B) in any manner to select or to control (or to have
employees, officers, or directors, or agents who constitute) a
majority of the directors, trustees, or management of a fund; or
‘‘(C) to share with a fund, for corporate, marketing,
promotional, or other purposes, the same name or a variation of
the same name.
‘‘(6) TRADING ACCOUNT.—
The term ‘trading account’ means any
account used for acquiring or taking positions in the securities
and instruments described in paragraph (4) principally for the
purpose of selling in the near term (or otherwise with the intent
to resell in order to profit from short-term price movements), and
any such other accounts as the appropriate Federal banking
agencies, the Securities and Exchange Commission, and the
Commodity Futures Trading Commission may, by rule
as provided
in subsection (b)(2), determine.
‘‘(7) ILLIQUID FUND.—
‘‘(A) IN
GENERAL.—
The term ‘illiquid fund’ means a
hedge fund or private equity fund that—
‘‘(i) as of May 1, 2010, was principally invested in, or was
invested and contractually committed to principally in vest in,
illiquid assets, such as portfolio companies, real estate
investments, and venture capital investments; and
‘‘(ii) makes all investments pursuant to, and consistent with,
an investment strategy to principally invest in illiquid as
sets. In issuing rules regarding this subparagraph, the Board
shall take into consideration the terms of investment for the
hedge fund or private equity fund, including contractual
obligations, the ability of the fund to divest of assets held by
the fund, and any other factors that the Board determines are
appropriate.
‘‘(B) HEDGE FUND.—
For the purposes of this paragraph, the term
‘hedge fund’ means any fund identified under subsection
(h)(2), and does not include a private equity fund, as such
term is used in section 203(m) of the Investment Advisers Act of
1940 (15 U.S.C. 80b-3(m)).’’.
The White House, January 21, 2010
President Obama Calls for New Restrictions on Size and Scope of
Financial Institutions to Rein in Excesses and Protect Taxpayers
President Obama joined Paul Volcker,
former chairman of the Federal Reserve; Bill Donaldson,
former chairman of the Securities and Exchange Commission;
Congressman Barney Frank, House Financial Services Chairman;
Senator Chris Dodd, Chairman of the Banking Committee and the
President's economic team to call for new
restrictions on the size and scope of banks and other financial
institutions to rein in excessive risk taking and to protect
taxpayers.
The President’s proposal would strengthen
the comprehensive financial reform package that is already moving
through Congress.
“While the
financial system is far stronger today than it was a year one year
ago, it is still operating under the exact same rules that led to
its near collapse,” said President Barack Obama.
“My resolve to reform the system is only
strengthened when I see a return to old practices at some of the
very firms fighting reform; and when I see record profits at some
of the very firms claiming that they cannot lend more to small
business, cannot keep credit card rates low, and cannot refund
taxpayers for the bailout. It is exactly this kind of
irresponsibility that makes clear reform is necessary.”
The proposal would:
1. Limit the
Scope - The President and his economic team will work with
Congress to ensure that no bank or financial institution that
contains a bank will own, invest in or sponsor a hedge fund or a
private equity fund, or proprietary trading operations unrelated
to serving customers for its own profit.
2.
Limit the Size - The President also
announced a new proposal to limit the consolidation of our
financial sector. The President’s proposal will place broader
limits on the excessive growth of the market share of liabilities
at the largest financial firms, to supplement existing caps on the
market share of deposits.
In the coming weeks, the
President will continue to work closely with
Chairman Dodd and others to craft a strong, comprehensive
financial reform bill that puts in place common sense rules of the
road and robust safeguards for the benefit of consumers, closes
loopholes, and ends the mentality of “Too
Big to Fail.” Chairman Barney Frank’s financial reform
legislation, which passed the House in December, laid the
groundwork for this policy by authorizing regulators to restrict
or prohibit large firms from engaging in excessively risky
activities.
As part of the previously announced reform
program, the proposals announced today will help put an end to the
risky practices that contributed significantly to the financial
crisis.
The White House. January 21, 2010
Remarks by the President on Financial Reform
Diplomatic
Reception Room
THE PRESIDENT: Good morning,
everybody. I just had a very productive meeting with two members
of my Economic Recovery Advisory Board: Paul
Volcker, who's the former chair of the Federal Reserve Board; and
Bill Donaldson, previously the head of the SEC.
And I
deeply appreciate the counsel of these two leaders and the board
that they've offered as we have dealt with a broad array of very
difficult economic challenges.
Over the past two years,
more than seven million Americans have lost their jobs in the
deepest recession our country has known in generations.
Rarely
does a day go by that I don't hear from folks who are hurting. And
every day, we are working to put our economy back on track and put
America back to work. But even as we dig our way out of this deep
hole, it's important that we not lose sight of what led us into
this mess in the first place.
This
economic crisis began as a financial crisis, when banks and
financial institutions took huge, reckless risks in pursuit of
quick profits and massive bonuses.
When the dust settled, and this
binge of irresponsibility was over, several of the world's oldest
and largest financial institutions had collapsed, or were on the
verge of doing so.
Markets plummeted, credit dried up, and jobs
were vanishing by the hundreds of thousands each month. We were on
the precipice of a second Great Depression.
To
avoid this calamity, the American people -- who were already
struggling in their own right -- were forced to rescue financial
firms facing crises largely of their own creation.
And that
rescue, undertaken by the previous administration, was deeply
offensive but it was a necessary thing to do, and it succeeded in
stabilizing the financial system and helping to avert that
depression.
Since that time, over the past year, my
administration has recovered most of what the federal government
provided to banks. And last week, I proposed a fee to be paid by
the largest financial firms in order to recover every last dime.
But that's not all we have to do.
We have to
enact common-sense reforms that will protect American taxpayers -–
and the American economy -– from future crises as well.
For while the financial system is far stronger today than it
was one year ago, it's still operating under the same rules that
led to its near collapse.
These are rules that allowed firms to
act contrary to the interests of customers; to conceal their
exposure to debt through complex financial dealings; to benefit
from taxpayer-insured deposits while making speculative
investments; and to take on risks so vast that they posed threats
to the entire system.
That's why we
are seeking reforms to protect consumers; we intend to close
loopholes that allowed big financial firms to trade risky
financial products like credit defaults swaps and other
derivatives without oversight; to identify system-wide risks that
could cause a meltdown; to strengthen capital and liquidity
requirements to make the system more stable; and to ensure that
the failure of any large firm does not take the entire economy
down with it.
Never again will the American taxpayer be held
hostage by a bank that is "too big to fail."
Now,
limits on the risks major financial firms can take are central to
the reforms that I've proposed. They are
central to the legislation that has passed the House under the
leadership of Chairman Barney Frank, and that we're working to
pass in the Senate under the leadership of Chairman Chris Dodd.
As part of these efforts, today I'm proposing two additional
reforms that I believe will strengthen the financial system while
preventing future crises.
First, we
should no longer allow banks to stray too far from their central
mission of serving their customers. In recent years, too many
financial firms have put taxpayer money at risk by operating hedge
funds and private equity funds and making riskier investments to
reap a quick reward.
And these firms have taken these risks while
benefiting from special financial privileges that are reserved
only for banks.
Our government provides deposit
insurance and other safeguards and guarantees to firms that
operate banks. We do so because a stable and reliable banking
system promotes sustained growth, and because we learned how
dangerous the failure of that system can be during the Great
Depression.
But these privileges
were not created to bestow banks operating hedge funds or private
equity funds with an unfair advantage. When banks benefit
from the safety net that taxpayers provide –- which includes
lower-cost capital –- it is not appropriate
for them to turn around and use that cheap money to trade for
profit.
And that is especially true when this kind of trading
often puts banks in direct conflict with their customers'
interests.
The fact is, these kinds of trading
operations can create enormous and costly risks, endangering the
entire bank if things go wrong.
We simply cannot accept a system
in which hedge funds or private equity firms inside banks can
place huge, risky bets that are subsidized by taxpayers and that
could pose a conflict of interest.
And we cannot accept a system
in which shareholders make money on these operations if the bank
wins but taxpayers foot the bill if the bank loses.
It's
for these reasons that I'm proposing a
simple and common-sense reform, which we're calling the "Volcker
Rule" -- after this tall guy behind me.
Banks will no longer be allowed to own,
invest, or sponsor hedge funds, private equity funds, or
proprietary trading operations for their own profit, unrelated to
serving their customers. If financial firms want to trade for
profit, that's something they're free to do.
Indeed, doing so –-
responsibly –- is a good thing for the markets and the economy.
But these firms should not be allowed to run these hedge funds and
private equities funds while running a bank backed by the American
people.
In addition, as part of our efforts to
protect against future crises, I'm also proposing that we
prevent the further consolidation of our
financial system. There has long been a deposit cap in
place to guard against too much risk being concentrated in a
single bank.
The same principle should apply to wider forms of
funding employed by large financial institutions in today's
economy. The American people will not be served by a financial
system that comprises just a few massive firms. That's not good
for consumers; it's not good for the economy.
And through this
policy, that is an outcome we will avoid.
My message to
members of Congress of both parties is that we have to get this
done.
And my message to leaders of the financial industry is to
work with us, and not against us, on needed reforms. I welcome
constructive input from folks in the financial sector.
But what
we've seen so far, in recent weeks, is an army of industry
lobbyists from Wall Street descending on Capitol Hill to try and
block basic and common-sense rules of the road that would protect
our economy and the American people.
So if these folks want
a fight, it's a fight I'm ready to have. And
my resolve is only strengthened when I see a return to old
practices at some of the very firms fighting reform; and when I
see soaring profits and obscene bonuses at some of the very firms
claiming that they can't lend more to small business, they can't
keep credit card rates low, they can't pay a fee to refund
taxpayers for the bailout without passing on the cost to
shareholders or customers -- that's the claims they're making.
It's exactly this kind of irresponsibility that makes clear reform
is necessary.
We've come through a terrible crisis.
The American people have paid a very high price.
We simply cannot
return to business as usual. That's why we're going to ensure that
Wall Street pays back the American people for the bailout. That's
why we're going to rein in the excess and abuse that nearly
brought down our financial system.
That's why we're going to pass
these reforms into law.
Who is Paul A. Volcker?
Mr. Volcker was born on September 1927 in Cape May, New Jersey. He
earned a bachelor of arts degree, summa cum laude, from Princeton
in 1949, and a master of arts degree in political economy and
government from the Harvard University Graduate School of Public
Administration in 1951. From 1951 to 1952, he was Rotary
Foundation Fellow at the London School of Economics.
Mr.
Volcker’s experience with the New York Fed
began when he worked as a research assistant in the research
department during the summers of 1949 and 1950. He returned to the
New York Fed as an economist in the research department in 1952,
and became a special assistant in the securities department in
1955. Two years later, he resigned to become a financial economist
at Chase Manhattan Bank.
In
1962, he joined the Treasury as Director of
the Office of Financial Analysis, and in 1963 he was appointed
Deputy Undersecretary for Monetary Affairs. In 1965, he rejoined
Chase Manhattan as vice president and director of forward
planning.
From 1969 to 1974, he was
Undersecretary of the Treasury for Monetary
Affairs. His five-and-a-half-year tenure covered a period
of rapid change in international and domestic financial affairs.
After leaving the Treasury, Mr. Volcker became senior fellow
at the Woodrow Wilson School of Public and
International Affairs at Princeton University for the
1974-75 academic year.
He was named
chairman of the Board of Governors of the Federal Reserve System
by President Carter, and was sworn in on August 6, 1979. He served
until August 11, 1987.
February 6, 2009: President Barack Obama today signed an
executive order establishing the new
Economic Recovery Advisory Board. The Board will provide an
independent voice on economic issues
and will be charged with offering
independent advice to the President as he formulates and
implements his plans for economic recovery. Paul Volcker is the
Chairman.
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