March 29, 2024

DealBook: Volcker Rule Divides Regulators

Regulators have faced a barrage of complaints from lawmakers and financial industry lobbyists in their 14-month-long quest to constrain risky trading on Wall Street, an effort known as the Volcker Rule. Now, as regulators begin a push to produce a final draft of the rule, they face hurdles from an unexpected group: themselves.

Though several federal agencies agreed last week to propose the initial version of the Volcker Rule, they are divided over some of its crucial details. The Federal Deposit Insurance Corporation, for example, has pushed for tough language that would require bank executives to vouch for their compliance with the Volcker Rule — a measure that the Office of the Comptroller of the Currency has been fiercely resisting, say people close to the regulators.

In recent weeks, some regulators even quarreled over which agency would vote first on the rule, according to one of the people close to the regulators. And while four regulators ultimately did vote, a fifth agency, the Commodity Futures Trading Commission, was conspicuous by its silence.

The commission, according to another person with direct knowledge of the issue, raised concerns that an earlier draft overlooked the costs and benefits of the Volcker Rule, an important standard whose absence could expose regulators to a legal challenge.

Both the rule’s critics and supporters fear that an escalating turf war could sidetrack regulators as they shape a final version of the overhaul by July 2012. While Wall Street opposes the proposal, it worries that the regulatory fracture will generate additional uncertainty over how to comply.

“You do see a split,” said Thomas Quaadman, a lobbyist for the Chamber of Commerce, which opposes the Volcker Rule. “They might be trying to get to the same place, but it’s difficult to get there.”

Henry Klehm, a lawyer at Jones Day and a former Securities and Exchange Commission official, noted that regulators would try to reconcile their differences, though “this means delay.”

The Volcker Rule bickering reflects broader tensions among financial regulators, who have amassed broad and sometimes overlapping powers in the aftermath of the financial crisis. The Dodd-Frank Act of 2010, the sprawling overhaul that spawned the Volcker Rule among 300 other regulations, transformed the regulatory landscape and is at the heart of the squabbling.

For one, regulators are divided on Dodd-Frank’s requirement that banks keep risk on their books when selling mortgage securities. Proposed rules for the derivatives industry, too, vary between agencies.

The Volcker Rule presents a particularly thorny task. Named for Paul A. Volcker, a former Federal Reserve chairman who campaigned for the rule, it aims to curb outsize risk-taking on Wall Street.

The rule would limit most proprietary trading, where a bank places bets for itself rather than for clients, a major money maker for the industry. Wall Street has warned that the rule will eat into profits just as banks are trying to regain their footing.

Anticipating complaints, regulators have already fashioned multiple exemptions to the ban, allowing banks to place trades when hedging against risk. Banks can also buy securities from one client with an eye toward later selling them to another, though the line is often fuzzy between that business and proprietary betting.

The proposal reflects the rule’s complexity, spanning nearly 300 pages and taking aim at some of the most arcane financial minutia. Davis Polk, a law firm that advises some of the nation’s biggest banks, has churned out multiple summaries of the proposal for clients and even started a Web site, Volckerrule.com.

The regulatory discord, analysts say, only compounds the confusion. While the Volcker Rule itself “would be a worthy study for Talmudic scholars, complicate this with five agencies having to write the rules and you have geometric expansion of complexity,” the accounting firm PricewaterhouseCoopers said in a recent report.

Still, regulators are open to tweaking the rule. The proposal posed nearly 400 questions, replete with multiple follow-up queries, for the industry and the public to ponder.

The question section ballooned in recent weeks as it became a favored destination for controversial provisions. When regulators failed to reach a compromise, a rule was relegated to a question for the public.

In recent weeks, the deepest divide centered on provisions that spelled out how regulators would enforce the Volcker Rule. One idea would require bank executives to promise compliance.

In August, a confidential draft proposal included the “C.E.O. attestation” clause in brackets, meaning it was “included for discussion purposes only, pending resolution at the principal level.”

The Office of the Comptroller of the Currency objected, according to the people close to the regulators, who spoke on the condition of anonymity because the discussions were private. The agency, which oversees national banks, flagged the executive compliance rule as a deal-breaker.

Over the last month, regulators scrambled to draft a compromise. The agencies formed Volcker Rule working groups, which held weekly phone calls and regularly gathered in a conference room at the F.D.I.C.’s Washington headquarters, the people said. Treasury Department lawyers occasionally mediated the dispute.

But in recent days only one compromise emerged: turn the C.E.O. rule into a question. Ultimately, regulators asked whether the rule would “be a preferable approach.”

The Office of the Comptroller of the Currency, with support from the Federal Reserve, also opposed an F.D.I.C. proposal that would force banks to turn over a battery of trading data to independent warehouses where regulators could keep an eye on the trades. Again, the provision was demoted to a question.

Regulators are playing down their differences.

Elise Walter, a Democratic commissioner at the Securities and Exchange Commission, said at a public meeting last week that the Volcker Rule had “been a very effective exercise in cooperation.”

At the same meeting, however, the agency’s lone Republican commissioner, Troy Paredes, voted to approve the rule but warned that he had “significant reservations.”

At the Federal Reserve, which quietly voted by e-mail recently, one board member, Sarah Bloom Raskin, opposed the proposal, according to a person with knowledge of the vote. It is unclear why she voted against the rule.

The Fed and the F.D.I.C. declined to comment.

“Developing any interagency rule is a complex process, particularly when regulators with different missions are involved, and this is quite a complex rule,” Bryan Hubbard, a spokesman for the comptroller’s office, said in a statement. He added that “banking and market supervisors were able to reach consensus.”

But the consensus did not include the Commodity Futures Trading Commission. The agency, according to the person with direct knowledge of the issue, objected to an August version of the proposal because it failed to include a full cost-benefit analysis of the Volcker Rule.

The agency is concerned that Wall Street will mount lawsuits against its policies, especially in light of a court decision over the summer that struck down a separate S.E.C. rule.

The latest draft of the Volcker Rule does outline the economic effects of the proposal.

The C.F.T.C., the smallest of the regulators, also says it feels it cannot currently spare the time and staff needed to review the Volcker Rule while it juggles dozens of other Dodd-Frank policies. It is unclear whether the agency will adopt a similar version of the rule.

Wall Street groups have already seized on what they see as a split among the agencies. One group, the Chamber of Commerce, sent a letter last week outlining its concerns with the Volcker Rule to Treasury Secretary Timothy F. Geithner.

“The Chamber is concerned that the lack of coordination,” the letter said, “injects additional uncertainty into an already fragile economy, and threatens to further endanger the economic recovery.”

Article source: http://feeds.nytimes.com/click.phdo?i=f786967f10bf4545de448d71b3048e7e

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