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Regulations

SEC becomes last agency to amend Volcker rule, opening a comment period

SEC Chairman Jay Clayton was one of three Republicans voting in favor of the change.

The Securities and Exchange Commission agreed Tuesday to amend the Volcker rule, which prohibits federally backed financial institutions from engaging in proprietary trading or having interests in private equity or hedge funds.

It is the last of five agencies to act on changes that include tailoring rules to a bank's size and clarifying exemptions for banks' proprietary trading activity. The proposed changes are now open for public comment for 60 days. The Federal Reserve, Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. all previously advanced the proposals.

The three Republican SEC commissioners, including chairman Jay Clayton, voted to proceed with the changes, while the two Democrats, Kara Stein and Robert Jackson Jr., voted against it.

Mr. Clayton noted at the commission meeting that banks and their regulators have gained experience with the rule adopted in 2013, and have identified ways to improve it by tailoring it to the level of a banking entity's trading activity. "In short, we recognize that, to effectively implement the Volcker Rule, one size does not fit all and its terms should reflect our collective experience," said Mr. Clayton, who encouraged people to weigh in on the proposed changes during the comment period.

Ms. Stein disputed some arguments that the proposal simply streamlines the Volcker rule, citing part of the SEC's economic analysis that the proposed changes "could increase moral hazard risks related to proprietary trading by allowing dealers to take positions that are economically equivalent to positions they could have taken in the absence of the 2013 final rule." Instead of taking those risks, she said, "I believe that we should be preventing acceleration of risks, conflicts of interest and concentration in our markets, not encouraging them."

In his dissenting opinion, Mr. Jackson said that it is already difficult for regulators to distinguish prohibited proprietary trading and that he worries that the changes "will muddy the waters even further, giving bank lawyers incentives to hide risky bets." The change, he said, "is inconsistent with Congress' clear intent to ban proprietary trading at these institutions."