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Exclusive: SEC may seek more power to enforce Volcker rule

A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June
A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June

By Sarah N. Lynch

WASHINGTON (Reuters) - U.S. securities regulators fear they do not have the full range of enforcement powers to police Wall Street's compliance with the controversial Volcker rule, and told Reuters they are considering new rules to fill the gap.

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.

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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