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Regulators to Testify About Effect of Volcker Rule

February 4, 2014

SEC Chair Mary Jo White and four other financial regulators will appear before the House Financial Services Committee to discuss the Volcker Rule, which bans banks from engaging in proprietary trading. The committee wants to question the regulators about the effect the rule will have on the economy and job creation.

SEC Chair Mary Jo White is scheduled to testify on February 5, 2014, before the House Financial Services Committee about the effect of the Volcker Rule on job creation.

In December 2013, the SEC, the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC), and the Commodity Futures Trading Commission (CFTC) issued Release No. BHCA-1, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, to implement the Volcker Rule from the 2010 Dodd-Frank Act.

Named for former Federal Reserve Chairman Paul Volcker, it bans banks from engaging in proprietary trading and from sponsoring hedge funds and private equity funds.

Supporters say the rule is needed to prevent speculative, excessively risky activity by banks. Opponents say that proprietary trading played little or no part in causing the 2008 financial crisis. And they also argue that drawing a line between proprietary trading and permissible activities is very difficult, making the Volker Rule unworkable.

According to a discussion memo released ahead of the hearing, committee members will question White and banking regulators on the impact of the Volcker Rule on the economy, the capital markets, and jobs.

In particular, the hearing will examine what kind of effect the Volcker Rule will have on banks’ ability to own tranches of collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS) and the impact of a related interim final rule issued on January 14.

The SEC and the other agencies issued the temporary rule to fix a provision in the Volcker Rule that would have forced banks to write down $2 billion to $3 billion in securities. Release No. BHCA-2, Treatment of Certain Collateralized Debt Obligations Backed Primarily by Trust Preferred Securities with Regard To Prohibitions and Restrictions on Certain Interests in, And Relationships with, Hedge Funds and Private Equity Funds, permits banks to keep interests in certain CDOs backed primarily by TruPS from the investment prohibitions. Without the exemption, some banks said they would have to initiate a fire sale of the securities and take large charges against their capital.

Release No. BHCA-2 says the banks can hold onto the securities if they were established and the interest was issued before May 19, 2010, and the banks purchased them before December 10, 2013, which was the date the regulators finalized the Volcker Rule. The proceeds from the TruPS CDOs have to be invested in collateral backed by a TruPS issued before May 19, 2010, by a depository institution with less than $15 billion in assets.

Lawmakers also are expected to question regulators about how the five agencies will coordinate compliance, examinations, interpretation, and enforcement of the rule.

Daniel Tarullo, governor of the Federal Reserve Board; Thomas Curry, the Comptroller of the Currency; Martin Gruenberg, Chairman of FDIC; and Mark Wetjen, Acting Chairman of CFTC are also scheduled to testify.

The final rule is set to become effective April 1, and banks have to start complying from July 21, 2015.