Wednesday, November 16, 2011

House Democrats Urge Rejection of Exemption-Laden Proposed Volcker Regulations as Outside Intent of Dodd-Frank

In a letter to Fed Chair Ben Bernanke, 17 House Democrats urged the Fed, the SEC and other federal financial regulators to reject the current draft of the Volcker Rule regulations and replace them with stronger language to prohibit commercial banks from engaging in investment activities. The Volcker Rule, as authorized by the Dodd-Frank Act, is intended to prohibit commercial banks and bank holding companies from engaging in proprietary trading and owning or investing in hedge funds or private equity funds. The letter, written by Rep. Maurice Hinchey (D-NY) and Rep. Peter Welch (D-VT), and signed by 15 other House members, contends that the Federal Reserve's draft regulations to implement the rule fall short of the intent of Dodd-Frank.

In the view of the House Democrats, the draft Volcker regulations are unnecessarily complex and include several large loopholes that undermine the congressional intent to protect banking deposits from risky trading activities. For example, under the draft, commercial banks would be allowed to engage in market making and hedging activities that can provide easy cover for risky proprietary trading. The draft also relies too heavily on banks to self regulate and self report.

These large loopholes will allow banks to continue the risky activities the Volcker Rule was designed to prohibit, emphasized the Representatives, and they will make enforcing the Volcker Rule incredibly difficult. Under the draft rule, federal financial regulators will be challenged with determining whether banks are masking prohibited trading under the guise of one of the many exemptions allowed under the proposed regulations.

The Representatives urged the regulators to heed the advice of former Fed Chair Paul Volcker and craft less complex regulations banning proprietary trading and making the board and chief executive officer responsible for compliance, accompanied by strong regulators who go after banks that do not comply with the spirit of the regulations. The letter concluded with a plea that Wall Street should no longer be allowed to gamble with the nation’s economic well-being by engaging in high risk proprietary trading.