House Democrats ask for tougher Volcker rule

WASHINGTON Wed Nov 16, 2011 6:04pm EST

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WASHINGTON (Reuters) - A group of House Democrats are asking regulators to start over with a proposed ban on proprietary trading by banks, arguing the current proposal has too many loopholes.

In a letter to Federal Reserve Chairman Ben Bernanke released on Wednesday, a group of 17 House Democrats said the draft rule unveiled last month should be scrapped and replaced with a more simple approach.

"The Federal Reserve's draft Volcker Rule is unnecessarily complex and includes several large loopholes that undermine Congress's intent to protect banking deposits from risky trading activities," the lawmakers wrote in their letter, which was spearheaded by Representatives Maurice Hinchey and Peter Welch.

The Volcker rule, named for former Fed Chairman Paul Volcker who championed the measure, aims to prevent banks that receive government backstops like deposit insurance from making risky trades with their own funds in securities, derivatives and other financial products.

It will also prohibit banks from investing in, or sponsoring, hedge funds or private equity funds.

The trading ban will have the most impact on large banks like Goldman Sachs and Morgan Stanley.

The Volcker rule was included in the 2010 Dodd-Frank financial oversight law and the draft rule released last month was written by the Fed, the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency and the Securities and Exchange Commission.

The rule is out for comment until January 13 after which a final proposal has to be drafted to fully implement the policy.

Some of the complaints the lawmakers are aiming at regulators have more to do with provisions included in the law passed by Congress.

For instance, the letter complains that the proposed rule would allow banks to engage in proprietary trading if it is done to make a market for a client or to hedge against related risks.

These exemptions to the ban, however, are permitted by the law.

Regulators have faced complaints that their interpretation of these exemptions is too broad.

The letter also cites recent comments from Volcker himself that the rule may be too complex.

At a November 9 event on the rule, however, Volcker's top aide, Tony Dowd, said the former Fed chairman is mostly supportive of the proposal, particularly the provision that lays responsibility for following the trading ban with senior management.

Dowd said Volcker feels it is more complex than needed, only because the banking industry was successful in its efforts to have exemptions added to the law.

"From Mr. Volcker's standpoint I think he is hanging his hat on the strong wording of the general prohibition on prop trading and the accountability for senior management and boards of directors to implement the policy," he said at an event hosted by Americans for Financial Reform, which supports the Volcker rule.

(Reporting by Dave Clarke; Editing by Carol Bishopric)

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