In technical terms, Congress handed regulators the baton awhile ago to impose a crackdown on proprietary trading.
But as the federal agencies grapple with turning the so-called Volcker Rule into regulation, the process seems almost like a joint effort between two branches of government. Congressional influence in implementation of laws is not new, especially within the bigger reform of the Dodd-Frank Act.
But the Volcker Rule is shaping up to be a case study of lawmakers continuing to sound off on an issue that is technically no longer under their purview. Observers expect more of the barrage of criticism lawmakers have already launched against a regulatory proposal for enforcing the rule. Meanwhile the agencies may actually invite some congressional involvement to provide cover for how they choose to implement what many see as vague legislation.
"Congress kicked the can to the regulators," said Margaret Tahyar, a partner at Davis Polk & Wardwell. "The regulators have struggled with this enormous challenge. We're going to see a lot of stakeholders with heightened concern about the proposal, and that is going to keep the attention of the congressional oversight committees on the Volcker Rule for some time."
Shortly before Christmas, the regulators — one day after lawmakers released a letter from more than 120 mostly Republican House members calling for more time to comment — extended the comment period on the proposal by a month to February 13th. Congressional review of the implementation process will likely not end there. Comment letters have already begun to trickle in from individual members.
Sen. Carl Levin, D-Mich., who authored the provision in Dodd-Frank with Sen. Jeff Merkley, D-Ore., said in a November speech that the regulators' proposal was not nearly tough enough."
"Both sides are going to continue to jawbone and grandstand to the greatest extent possible for them," said Brian Gardner, a political analyst at Keefe, Bruyette & Woods Inc., and a former Hill staffer. "Going into an election year, it plays to both sides."
But a continued role for Congress, well after Dodd-Frank's passage, may also be pragmatic. The Volcker Rule is "a whole new statute with broad implications for the functioning of the capital markets," said Kenneth Bentsen, a former Texas Democratic congressman and now executive vice president for public policy and advocacy for SIFMA. "Members of Congress have shown a keen interest in making sure that regulators do this very carefully so as not to constrict the flow of capital unnecessarily."
The provision — named for former Federal Reserve Board Chairman Paul Volcker who first proposed the rule — essentially bans banks from using their own accounts for proprietary trading, as well as from having principal interests in private equity and hedge funds. While including exemptions, such as certain market making and hedging activities, the law leaves the regulators with substantial latitude to define exactly which activities are banned, and the "permitted activities" that get an exemption.
Yet critics in Congress and the industry say the resulting proposal was too complex. Some say the trading restrictions appear to cut two ways. On one hand, the new policy severely constrains a bank's trading capability. On the other, the intricacies of the proposal — including how broadly the restrictions and permitted exceptions are defined — cause some institutions that did not view themselves as subjects of the banks to worry about compliance.
Experts said clarity from Congress about what lawmakers intended will help regulators draft the regulation. "The central issue with the rule is that it imposes obligations on every bank," said Dwight Smith, a partner at Morrison & Foerster. "That's a reasonable reading of what the statute requires. But it doesn't make a lot of sense to have every bank undergo some sort of Volcker Rule compliance effort. It would certainly be helpful to have some kind of message from Congress that having a somewhat lighter hand is okay."
With changes to Dodd-Frank unlikely, observers said lawmakers' influence can be as simple as concise letters to the regulators discussing how members read the statute.
But regulators will likely not give all congressional feedback equal weight, since many lawmakers have significantly different ideas about how the final rule should be crafted. Levin, Merkley and other Democrats said the exceptions outlined in the proposal weakened the ban, while several GOP lawmakers said the proposal's complexity threatens to make the rule harsher than Congress intended.
"There's not a unified voice coming from the Hill," Gardner said. "If it's political cover, it needs to be bipartisan. It's very tough for the regulators to take comfort in what the Hill is saying, because they're going to get conflicted messages."