Northern Trust Corp.
Date: 5/10/11; 6/3/11; 6/13/11
SIC No.:
6022 Subject Filing: 10-K
State: DE
Accession No. (Staff Letter):
0000000000-11-028990; 0000000000-11-036266
Accession No. (Co. Letter):
0001193125-11-158428
In what may be the first published
SEC staff comments to a company regarding the Volcker
rule, the staff asked Northern Trust Corp. to provide
additional explanation of foreign currency trading on
behalf of its clients. The staff, upon reviewing the
Form 10-K filed by Northern Trust, inquired whether
foreign currency trading services provided by the bank
to customers amounted to proprietary trading under the
Volcker rule. Specifically, the staff observed that it
was unclear how much of Northern Trust’s foreign
currency trades were for its own account and how much
trading was conducted on behalf of clients. Thus, the
staff asked the bank to separately quantify proprietary
trading revenues (if material) to better inform
investors of the significance of proprietary trading to
the bank’s overall results of operations. The staff
requested that the bank explain the future impact of any
proprietary trading limits imposed by the Volcker rule
on its proprietary trading activities. The staff also
asked Northern Trust to explain in its future filings
how it intends to comply with the Volcker rule.
Northern Trust replied that it does not
engage in proprietary trading as defined in the
Dodd-Frank Act. The bank noted that it acts as a foreign
exchange market maker and principal in order to provide
foreign exchange services to customers in the normal
course of its business. The bank stated that it acts as
market maker and as principal in transactions with third
parties, investment managers of clients, and with some
clients directly. As a result, Northern Trust trades
currencies in the interbank market and may hold
inventory positions in currencies to promote efficient
trading. The bank described these interbank transactions
in aid of its market making services as
"trading for its own account"
in its Form 10-K. The bank records aggregate revenues
from such trades as foreign exchange trading income in
its consolidated income statement. In addition, the bank
observed that it had already disclosed in its Form 10-K
regulatory section that it did not expect the Volcker
rule to impact its foreign currency trading activities.
[ Editor’s Note: Northern Trust did not discuss
in its reply whether its activities may fall within in
any of the permitted activities, including permitted
market-making-related activities. However, the bank did
discuss these permitted activities in Page 5 of its Form
10-K for the year ended December 31, 2010, filed
February 25, 2011.] The bank further noted that it could
not assess the full impact of the Volcker rule since
multiple federal regulators must adopt rules and
regulations over several years in order to fully
implement the restrictions on proprietary trading. The
staff subsequently indicated that it had completed its
review.
[ Editor’s Note: The Volcker rule
is contained in Section 619 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank
Act). The rule amends Section 13 of the Bank Holding
Company Act of 1956 to prohibit most forms of
proprietary trading by banks and nonbank financial
institutions supervised by the Board. The Volcker rule
thus prohibits a banking entity from engaging in
proprietary trading, or from acquiring or retaining any
equity, partnership, or other ownership interest in, or
sponsoring a hedge fund or a private equity fund. (Bank
Holding Company Act of 1956 Section 13(a)(1) as amended
by Section 619 of the Dodd-Frank Act).
"Proprietary trading" means
engaging as principal for the trading account of a
banking entity or nonbank financial company supervised
by the Board in any transaction to buy or sell any
security, derivative, contract of sale of a commodity
for future delivery, any option on any such security,
derivative, or contract, or any other security or
financial instrument identified by federal regulators
(Bank Holding Company Act of 1956 Section 13(h)(4) as
amended by Section 619 of the Dodd-Frank Act). A
"banking entity" is an
insured depository institution, a company that controls
an insured depository institution, or a company that is
treated as a bank holding company, including any
affiliates or subsidiaries. "Insured
depository institution" does not include trust
and fiduciary activities that meet specified criteria.
(Bank Holding Company Act of 1956 Section 13(h)(1) as
amended by Section 619 of the Dodd-Frank Act).
The Volcker rule, however, permits some
activities, including the buying and selling of
securities for purposes of market-making-related
activities, if the permitted activity is designed not to
exceed reasonably expected near term demands of clients,
customers, and counterparties (Bank Holding Company Act
of 1956 Section 13(d)(1)(B) as amended by Section 619 of
the Dodd-Frank Act). Even permitted activities, however,
are subject to limits due to material conflicts of
interest, material exposure to high-risk assets or
trading strategies, safety and soundness concerns, and
threats to U.S. financial stability (Bank Holding
Company Act of 1956 Section 13(d)(2)(A) as amended by
Section 619 of the Dodd-Frank Act). Permitted activities
must satisfy any capital and quantitative limits
established by rules (Bank Holding Company Act of 1956
Section 13(d)(3) as amended by Section 619 of the
Dodd-Frank Act). Permitted activities also must not
violate the anti-evasion provisions established by
federal regulators (Bank Holding Company Act of 1956
Section 13(e) as amended by Section 619 of the
Dodd-Frank Act).]