Finance sector girds for battle on ‘Volcker Rule’ for banks

Regulators ushered in one of the fiercest lobbying fights over the Wall Street reform law Tuesday with a proposal to implement the controversial “Volcker Rule” to limit risky investments by banks.

While regulators have been writing new regulations since President Obama signed the Dodd-Frank law 15 months ago, the Volcker Rule dwarfs most of the law’s other provisions in size and scope.

With perhaps billions of dollars at stake, the financial industry is girding for battle.

“It’s in the top tier of issues because it has such a far-reaching impact,” said Ken Bentsen, who heads the Washington office of the Securities Industry and Financial Markets Association (SIFMA).

Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, estimated that about half the impact from the Dodd-Frank law derives from the Volcker Rule and new rules on derivatives.

The rule — named for former Federal Reserve Chairman Paul Volcker — is intended to block banks from “proprietary trading,” which is trading done for company profit and not at the direction of clients. The rule bans extensive relationships between banks and hedge funds or private equity funds in an effort to prevent banks from being dragged down by a riskier fund that takes major losses.

Regulators took their first crack at implementing the rule Tuesday, putting forward a dense proposal spanning nearly 300 pages. It asks for public input on nearly 400 specific points, reflecting the complexity of the task at hand.

The American Bankers Association slammed the proposal Tuesday as “unworkable.”

“Only in today’s regulatory climate could such a simple idea become so complex, generating a rule whose preamble alone is 215 pages, with 381 footnotes to boot,” said ABA President Frank Keating. “How can banks comply with a rule that complicated, and how can regulators effectively administer it in a way that doesn’t make it harder for banks to serve their customers and further weaken the broader economy?”

Regulators are being yanked in opposite directions as they work to implement the rule.

Banks and financial institutions have been pressing hard for broad exemptions, arguing tight restrictions could hinder firms’ flexibility and make it difficult for them to operate effectively.

“The key for us is the ability to help our clients manage risk or asset management,” Talbott said. “That’s what this is all about.”

The implementation of the Dodd-Frank law has spurred a flurry of activity on K Street.

At least 30 entities disclosed lobbying on the Volcker Rule in 2010, according to a review of lobbying disclosure records by The Hill. The groups and companies spent a cumulative $17.2 million on advocacy during the quarters for which they disclosed lobbying on the rule. 

So far in 2011, at least 11 firms have disclosed lobbying on the Volcker Rule, The Hill found. Those firms spent a total of $6.9 million on lobbying during the quarters that they disclosed lobbying on the rule.

Bank of America led the charge against the regulation in 2010, spending $3.8 million on lobbying on the rule and other issues. In 2008 and 2009, before Dodd-Frank was passed, the bank spent a combined $7.6 million lobbying Congress and federal agencies on a variety of topics.

The number of banks and other entities lobbying on Volcker is probably even more substantial than the numbers depict. Those figures reflect the work of firms that disclosed specific lobbying on that rule, while many others reported comprehensive lobbying on Dodd-Frank as a whole, which would likely include it.

Proponents of the Volcker Rule have put their own squeeze on regulators, urging them to hold firm and not give financial institutions a loose leash.

Rep. Earl BlumenauerEarl BlumenauerDems introduce bill to eliminate ICE, shift duties elsewhere 'Paws for Celebration' event brings rescue animals to the Capitol The farm bill fails animals in need MORE (D-Ore.) spearheaded a letter sent by a handful of House Democrats to regulators urging them to draft an “ironclad rule.”

“People push the limits, and it’s better to err on the side of being specific and narrow rather than potentially opening up the floodgates again,” Blumenauer told The Hill.

But even after months of work and millions of dollars in lobbying, the struggle over the Volcker Rule is just beginning. In an indication of how complicated the matter really is, regulators are giving interested parties until Jan. 13 to weigh in on the proposal — a 90-day window, instead of the 60 usually offered by regulators.

The rule as written does include several exemptions. For example, regulators are looking to still allow firms to engage in “market making,” which is when firms make deals to support a market that regulators otherwise think would be weak or nonexistent. But Wall Street backers are not convinced regulators got it right with the first draft.

“We are concerned that based upon first review, that this proposal … potentially creates an overly complex and burdensome compliance regime that could have the effect of limiting traditional market-making activities,” Bentsen said.

In addition, banks are free to buy U.S. government debt, and bonds from state and local governments, without having to worrying about complying with the rule.

Banks could also engage in activities that would normally be banned, so long as the moves are intended to guard against risk created by client-driven transactions.

However, if a bank does engage in those exempted activities, it must set up an internal compliance program specifically tailored to ensure it stays within the contour of the Volcker Rule and its regulations.

Banks with major trading operations must also provide data to regulators that helps them identify potential Volcker violations or other high-risk assets or trading.

The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency signed off on the proposal Tuesday. The Securities and Exchange Commission is expected to follow suit Wednesday, while the Commodity Futures Trading Commission will issue its own similar proposal in the future.

Rachel Leven contributed to this story.