US SEC to begin work on Basel II rules

The US Securities and Exchange Commission (SEC) will soon issue a set of proposals, consisting of rule amendments and new rules, to create two separate voluntary regulatory frameworks for the supervision of broker-dealers and their affiliates on a consolidated basis, according to an announcement on Wednesday.

One proposal would establish an alternative method to compute certain net capital charges for broker-dealers that are part of a holding company that manages risks on a group-wide basis, and whose holding company consents to group-wide Commission supervision. The framework would be consistent with the Basel II capital standards. It would require computation of market and credit risk capital charges and compliance with rules about internal risk management control systems.

The other proposal would provide a Basel II framework for the consolidated supervision of holding companies of broker-dealers, also known as ‘investment bank holding companies’. These entities would have to apply to be supervised by the SEC, and would be subject to supervision by the SEC of the firms’ record-keeping, reporting and other requirements.

The SEC has come in for heavy criticism during the past few months from regulators and banks around the world. Until the advent of these new rule proposals, it seemed possible that US investment banks would not be subject to the new Basel II proposals for banking supervision. The SEC had not been part of the Basel Committee on Banking Supervision and had not supervised the banks that it oversaw on a consolidated basis. As a result, firms such as Goldman Sachs and Morgan Stanley would have been forced to comply with Basel II in Europe, but not at their US headquarters.

European banks, which believed this would place them at a competitive disadvantage, were vocal in their criticism of US regulatory authorities. They were joined by European regulators, which argued that US authorities needed to apply Basel II to the large investment banks as well behind closed doors.

The comment period for this document will start as soon as it is published in full in the Federal Register. It will last for 90 days.