SEC, banking regulators disagree on Volcker Rule definitions

The Securities and Exchange Commission and banking regulators voiced conflicting views this week on how to best define activities permitted under the Volcker Rule, an indication that the rule may not be ready anytime soon.

The dispute arose over how to define market-making, the buying and selling of securities for clients, and whether banks should be able to invest in hedge funds, according to the Wall Street Journal.

The controversial Volcker Rule prohibits banks from engaging in proprietary trading, or risky bets with their own funds, though the rule does allow banks to participate in market-making activities. The rule also limits the amount that banks can invest in hedge funds.

Paul Volcker, the former chairman of the Federal Reserve and the rule’s namesake, said that the measure would prevent banks from involving taxpayers when they incur trading losses. Critics of the rule, however, say that it could damage U.S. competitiveness and profitability, the Wall Street Journal reports.

A report from Standard & Poor analysts released on Monday estimates that if regulators decide to stiffen the rule, the measure could hit the pretax profits of America’s eight largest banks by $10 billion a year, an increase from earlier estimates of $4 billion.

Brokers, who are overseen by the SEC, participate in market-making activities, so the SEC is pushing for increased influence on the issue. The SEC may encounter some difficulty, however, as the heads of three banking regulatory agencies, including Federal Reserve governor Daniel Tarullo, acting chairman of the Federal Deposit Insurance Corp. Martin Gruenberg and comptroller of the currency Thomas Curry agree on the final version of the Volcker Rule, according to the Wall Street Journal.

The Commodity Futures Trading Commission, the fifth agency responsible for implementing the Volcker Rule, expects to influence the final language of the measure after banking regulators determine the main provisions.

Another area of conflict involves how to define funds in which banks are banned from investing. The rule mandates that banks are limited in how much they can invest in or own hedge funds or private equity funds, though the terms are broadly defined. The U.S. Treasury recommended that the agencies narrow the definition, the Wall Street Journal reports.

If regulators remain gridlocked on the Volcker Rule, the final version of the measure, which had a July deadline, may be delayed even further. Some groups in the financial industry have voiced concern about regulators publishing different versions of the rule. The Volcker Rule requires that only the three banking regulators approve identical language.

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