Financial Fraud Law

Reaction to the New Volcker Rule: Not Enough, and Too Much

 As has been widely reported, five federal agencies today issued final rules to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a/k/a the “Volcker Rule.” 

The final rules prohibit insured depository institutions and companies affiliated with insured depository institutions from engaging in short term proprietary trading of certain securities, derivatives, commodity futures, and options on these instruments for their own account. The final rules also impose limits on banks’ investments in, and other relationships with, hedge funds or private equity funds. 

There are exemptions in the final rules for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds.  The final rules also indicate that certain activities are not prohibited, including acting as agent, broker, or custodian.

The reaction to the rules seems to be what one might expect. Here are two examples:

In a statement, the group “Public Citizen” first bemoaned “months of unnecessary delay,” and then commended the agencies for completing the rule. Public Citizen then lowered the boom:  It said that although there were “many positive aspects of the final rule,” there “still could be too many opportunities for banks to disguise as permitted activity what should be deemed prohibited propriety trading.”

Bart Naylor, financial policy advocate for Public Citizen’s Congress Watch division, warned that, “if regulators don’t in practice deploy this Volcker rule to change the casino culture on Wall Street and protect American taxpayers, then Congress should stand alert. The strongest protection for consumers, taxpayers, and the financial system will come with the passage of the complete separation of commercial and investment banking through the 21st Century Glass-Steagall Act.”

So, Public Citizen is not very happy.

What about the Financial Services Roundtable, which represents 100 of the largest integrated financial services companies in the nation? FSR Chief Executive Officer Tim Pawlenty issued a statement that began by stating that financial institutions “should not engage in unreasonable risk” - a statement that one cannot disagree with. He then said that regulators “should not stifle investments essential to growing jobs and small businesses.” Concluding, the former Minnesota governor stated that the Volcker Rule “leans against striking that balance as it will reduce needed access to capital.”

So, we know where the FSR stands on the Volcker Rule, too.

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