* Banks hit Volcker rule private equity, hedge fund curbs
* Frank sees Volcker's views on exemption push as pivotal
* Lobbyists seek "de minimis" exemptions to proposed rule
WASHINGTON, June 15 (Reuters) - Banks are pressing the U.S. Congress for exemptions to a part of the proposed Volcker rule under Wall Street reform legislation that would curtail their ties to private equity and hedge funds, but the banks' prospects were dimming on Tuesday.
Representative Barney Frank said opposition to exemptions lodged by White House economic adviser Paul Volcker, author of the proposed rule, will be pivotal as a Senate-House conference panel considers the historic legislation.
"I think his view will be very influential," Frank, a Democrat and chairman of the joint Senate-House panel, told Reuters in an interview.
The fight has to do with a part of the Volcker rule that would bar banks from sponsoring or investing in private equity and hedge funds. The debate on the rule has largely has been overshadowed by a focus on "proprietary trading" limits.
But the rule's proposal to divorce banking from private equity and hedge funds "would likely have the most significant immediate impact," especially for big banks, law firm Shearman & Sterling said in an analysis last week.
If the rule is adopted as written, its limitations on bank affiliations with funds "would require some form of divestiture by the affected institutions," Shearman & Sterling said.
Over one-quarter of all private equity investments between 1983 and 2009 involved bank-affiliated private equity groups, said a recent study by professors at Harvard University and INSEAD, an international graduate business school.
Financial giants such as Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Credit Suisse (CSGN.VX) and Citigroup (C.N) have been deeply involved in private equity deals, the study said.
"This is a huge business," said Harvard Professor Josh Lerner, a co-author of the study. "Bank-affiliated private equity is like private equity on steroids."
He said the study showed that banks tend to pile into private equity markets when they peak, aggravating volatility.
Banks have been asking for an exemption that would let them continue to make small, or "de minimis," investments in funds, which they say is key to their asset management business. Banks say they need to invest in funds along with clients they steer into the funds.
BNY MELLON: SKIN IN GAME IMPORTANT
"Institutional clients like pension funds and endowments request specific investment strategies, and asset managers like us create funds for them," said Bank of New York Mellon Corp (BK.N) spokesman Kevin Heine.
"These clients generally want us to invest in these funds so that we have 'skin in the game.' Another activity we provide is seed capital for a new fund. Clients expect us to develop a track record and then invite them to invest."
Along with Bank of New York Mellon, State Street Corp (STT.N) and Northern Trust (NTRS.O) have been most active in pursuing the issue, said two senior congressional aides.
"Many trust banks, including State Street, manage assets as part of their normal activities," said State Street spokeswoman Alicia Curran. "The proposed Volcker rule, while aimed at eliminating risky or speculative activity by banks, could negatively impact traditional bank asset management business."
Last month, Volcker wrote to lawmakers saying he firmly opposed exempting banks from the rule that he and President Barack Obama first unveiled in January. "I absolutely oppose any such modification" Volcker said.
Volcker, a former Federal Reserve chairman who commands deep respect on Capitol Hill, told CNBC on Monday: "The problem with making exceptions with plausible cases by individual institutions is once you begin, you can never stop.
"And if you make enough exceptions, you no longer have a rule. ... We do not want, in my view, the United States government implicitly standing behind the trading activities of these institutions."
As Volcker's ban on proprietary trading by banks has looked increasingly likely in recent weeks to become law, banking lobbyists have redeployed resources on the funds issue.
CONFERENCE COMMITTEE RESUMES
On Tuesday, the conference committee resumed working on merging reform bills already approved by the House and Senate. A final package could go to Obama to be signed into law by the end of the month, analysts have said.
"There has been an intense push to try to eliminate the co-investment portions of the Volcker rule, or develop a safe harbor or some sort of 'de minimis' exemption," said Raj Date, executive director of the Cambridge Winter Center for Financial Institutions Policy, a research group on financial oversight.
But he suggested that the banks' exemption idea is flawed and may falter.
Clients are unlikely to be convinced that their interests are aligned with their bank's, Date said, if the co-investment involved is "de minimis," or not very important to the bank.
"It's sort of illogical on its face ... I'm hopeful that this thing dies of its own weight," Date said. (Editing by Leslie Adler)