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The Volcker Rule adopted after a 3-year wait

The Volcker rule was adopted on Tuesday, December 10, 2013 by five regulatory agencies including the Securities and Exchange Commission (the “SEC”). The original proposal was drafted in 2010 and received more that 19,000 comment letters from industry participants. The final rule was adopted by the SEC with a narrow 3 to 2 vote. It is interesting to read the strong dissenting opinions by Commissioners Gallagher and Piwowar who thought that the rule was so substantially different than the proposal that it should have been re-submitted for comment and not presented to the SEC for adoption in the rushed manner that it was presented at year-end. Commissioner Gallagher mentioned that the SEC received the final draft on December 5 which left little time for careful consideration.

The Volcker Rule prohibits banking entities from:

  • engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account.
  • owning more than 3% of, or investing more than 3% of their equity in, hedge funds or private equity funds, referred to as ‘covered funds’. Sponsoring and investing in private funds is considered risky.

What is of relevance to fund managers is that banking entities are allowed to invest in or sponsor a covered fund in connection with organizing and offering that fund to investors.  “Covered funds” include all 3(c)(1) or 3(c)(7) funds but exclude certain foreign funds publicly offered abroad, insurance company accounts, certain corporate vehicles and commodity pools as well as loan securitizations.

Regarding the ban on proprietary trading, the rule allows exceptions for, among others, underwriting, hedging, trading in government securities and, most importantly, market-making. It should be noted, however, that Commissioner Gallagher believes that the final rule will undermine essential market-making activities. In Commissioner Gallagher’s words “pure prop trading by banking entities has almost completely disappeared, and what remains is to define and regulate the grey area activities that may or may not constitute prop trading – activities which encompass, crucially, virtually the entire field of market-making.  What we face, therefore, is the prospect of banning the market-making practices so central to our capital markets in order to make sure we capture every last activity that could potentially be characterized as prop trading”. It remains to be seen if his fears will prove correct.

The final rule becomes effective April 1, 2014, but banks have until July 21, 2015 to prepare.

We will write more about the rule in subsequent communiques. In the meantime, the text of the rule can be found here and the dissenting opinions of commissioners Gallagher and Piwowar can be found here and here.

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Communiques

SEC3 Newsletter

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Understanding How to Mitigate Liability and Navigate Insurance Options (Part II)

In June, we shared our thoughts around common insurance gaps and insurance riders that CCOs as well as managers should understand. One of the gaps we shared related to pre-claim... read more »

Cybersecurity - What have we learned and what have we done?

Regulatory Landscape In April 2015, the Securities and Exchange Commission ("SEC's") Division of Investment Management issued a guidance update, identifying cybersecurity as a critical issue. Several regulators are in fact focusing... read more »

Gatekeepers in SEC Crosshairs

Ever since the enforcement cases were announced as part of the SEC’s “Operation Broken Gate,” the SEC enforcement division has continued to ramp up scrutiny of gatekeepers including third-party service... read more »

Anna M. Bencrowsky, CRCP, CMFS Joins SEC3

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Events

May 23, 2017 - Webcast: WannaCry Ransomware: Were You Really Protected or Just L…

When: Tuesday, May 23rd, 2017 | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. We...

June 14, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Willkie Farr & Gallagher LLP | 600 Travis Street | Suite 2310 | Houston, TX Barry Barbash from Willkie Farr & Gallagher LLP,...

June 13, 2017 - Compliance Breakfast Briefing

8:30-9:00am - Networking and Continental Breakfast 9:00-10:30am - Program Location: Haynes and Boone, LLP | 2323 Victory Avenue | Suite 700 | Dallas, TX 75219 Validated parking is available in the garage attached...

May 31, 2017 - Chicago

9:00-9:30 a.m - Networking and Continental Breakfast 9:30-11:00 a.m - Program Location: Baker & McKenzie LLP | 300 East Randolph Drive | Suite 5000 | Chicago, IL 60601 Kristin Gonzalez and Jerome Tomas...

May 17, 2017 (NYC WIMF)

This event is by invitation only. Please email info@seccc.com to learn more.

May 15, 2017 (NYC Chief Compliance Officer Roundtable)

9:00-9:30am - Networking and Continental Breakfast 9:30-11:00am - Program Location: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone:...

Webcast: The Most Insidious Cybersecurity Threat Is Also The Least Understood

When: Tuesday, April 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder, BW Cyber Services John Lukan, Managing Director, SEC Compliance Consultants, Inc. Ransomware, the...

CCO Liability (Part III): Managing Liability Webinar

In this webinar, panelists discuss indemnifications and insurance as potential remedies to address the direct financial risks to a CCO. Attendees will learn: What terms and conditions should Chief Compliance Officers be...

Webinar: CCO Liability (Part III): Managing Liability: Navigating Indemnities an…

When: Tuesday, February 21, 2017 Schedule: 11:00am ET / 10:00am CT / 9:00am MT / 8:00am PT / 7:00am AT Description of Webinar: The National Society of Compliance Professionals is pleased to host...

Webcast: SEC 2017 Examination Focus Area – Cybersecurity Testing

Penetration Testing & Vulnerability Assessments - Examining the SEC & FINRA Requirements When: Wednesday, January 25th | Schedule: 12pm - 1pm EST Who: Paul Caiazzo, CEO and Co-Founder, TruShield Security Solutions Michael Brice, Founder,...

Chief Compliance Officer Roundtable: Breakfast Briefing

When: October 20, 2016 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 | 22nd Floor Boardroom | Phone: 212.885.5000 Thomas Westle and Janaya...

Practicing Law Institute - Hedge Fund Management 2016

When: September 15, 2016 Where: New York & concurrent webcast | 1177 Avenue of the Americas | New York, NY 10036 Schedule: 9:00 am – 5:00 pm Janaya Moscony, President of SEC3 will...

CHIEF COMPLIANCE OFFICER ROUNDTABLE: BREAKFAST BRIEFING

When: April 13, 2016 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 22nd Floor Boardroom Thomas Westle and Janaya Moscony, along with industry experts,...

COMPLIANCE SCIENCE SUMMIT 2015

When: November 17, 2015 Where: Convene Midtown East | 730 Third Avenue | New York, NY 10017 Janaya Moscony, President, SEC Compliance Consultants, Inc. will be moderating a...

CHIEF COMPLIANCE OFFICER ROUNDTABLE: BREAKFAST BRIEFING

When: October 13, 2015 Where: Blank Rome LLP | The Chrysler Building | 405 Lexington Avenue | New York, NY 10174 22nd Floor Boardroom Thomas Westle and Janaya Moscony, along with...