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 Officials at the U.S. Securities and Exchange Commission say the
rule, which generally bans banks from making speculative bets with
their own money, does not currently allow the agency to police
brokerages for technical violations.
While such violations may seem minor, those types of enforcement
actions are an important part of the SEC's mission, and they can
deter or prevent more egregious behavior and send markets a strong
regulatory warning.
"If we want to sanction a firm for not keeping the records or
documents they are required to keep or provide reports to us in the
form (it is) required, we need to take further action," John Ramsay,
acting director of the Trading and Markets Division at the
Securities and Exchange Commission, told Reuters in an interview
this week.
"It is under consideration. I think we realize that in order to have
the full range of authority ... we need to do the additional step,"
he added.
The Volcker rule was adopted jointly in December by five regulators
including the SEC, after they worked for about three years to craft
a workable rule.
It aims to crack down on the kinds of risky trades that further
destabilized large Wall Street banks during the crisis and were
behind JPMorgan's $6 billion "London whale" trading loss in 2012.
Regulators struggled to draft a rule that would clearly define what
sort of "proprietary" trades would be prohibited, while still
allowing for trades that hedge risk and those designed to meet
future customer demand.
The final draft took a middle ground, but questions remain about
exactly how it will be enforced when it fully goes into effect in
July 2015, especially when multiple regulators share responsibility.
The SEC, Commodity Futures Trading Commission, Federal Reserve,
Federal Deposit Insurance Corp and Office of the Comptroller of the
Currency each get a slice of enforcement responsibility based on the
types of firms they supervise.
ENFORCEMENT
The SEC, for instance, will police broker-dealers and security-based
swap dealers, while the Fed has authority over bank holding
companies.
But the dilemma for the SEC lies in the fact the Volcker rule falls
under the Bank Holding Company Act — the law that empowers bank
regulators.
By contrast, the SEC derives its full set of enforcement tools to
police brokers under a different law — the Securities Exchange Act.
Such tools include imposing fines and cease-and-desist orders.
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For now, the main authority the SEC has to enforce the rule will be
to order a brokerage, after a notice and hearing, to stop certain
activities that may violate the Volcker rule.
That authority to order banks to stop trading activity or divest
certain holdings is available to all five regulators under the new
Volcker rule.
"We still have the authority to go after a broker-dealer that says
you are not complying with the proprietary trading restrictions,
therefore you have to stop this activity ... That is the most
important authority that exists with respect the Volcker rule,"
Ramsay said.
"That is in the bag."
But the SEC believes it does not currently have the power to punish
banks and brokerages that do not properly maintain certain documents
so regulators can monitor for compliance.
The Volcker rule, for instance, orders banks to file reports
containing certain quantitative metrics so regulators can keep a
watchful eye on trading activities.
If the SEC proceeds with a rulemaking, the agency would need to
align its full authorities under the Exchange Act with its new
policing responsibilities under the Volcker rule.
"The bank regulators are used to squishy rules and they use their
prudential program ... to enforce them. And where the rule doesn't
really fit, they can work within the prudential program to
accommodate that," said Republican SEC commissioner Daniel
Gallagher, who voted against the Volcker rule.
"There is no Exchange Act provision that links itself to our
enforcement authority ... I think we need a rulemaking under the
Exchange Act."
(Reporting by Sarah N. Lynch; editing by Karey Van Hall and Sophie Hares)
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