House Financial Services Committee Chairman Barney Frank said Tuesday that the White House's proposal to stop banks from certain risky trading practices would "very likely" be in the final financial overhaul but that a separate provision to force banks to spin off their derivatives businesses "goes too far."
The Massachusetts Democrat is a central player in the effort to reconcile a regulatory reform bill that passed the House in December with the separate bill that passed the Senate last week.
The limit on high-risk trading, known as the Volcker Rule, was in the Senate bill but not the House measure.
Frank's vocal support for the Volcker Rule increases the chances it will be incorporated into the final legislative package, which could be signed into law by July 4.
But his opposition to the derivatives spinoff plan, which has been championed by Senate Agriculture Committee Chairman Blanche Lincoln, D-Ark., raises the chance that this provision will be altered or stripped out of the bill. Frank's comments on it were pointed.
"Banks ought to be able to hedge their own risks," Frank said. He said banks would be prohibited from overly risky derivatives activities by the Volcker Rule and that the separate provision would be unnecessary.
"I don't see the need for a separate rule regarding derivatives because the restriction on banks engaging in proprietary activities would apply [to] derivatives as well as everything else," he said.
Frank said banks would be able to trade derivatives under the rules established by the bill "for their own commercial risk or their customers' but they will not be able to run separate profit centers where they trade them."
In a speech at the Mayflower Hotel in Washington, Frank discussed the prospects for several other disputed provisions.
The final bill will probably retain a House provision to exempt small and midsize companies from audits required under the 2002 Sarbanes-Oxley accounting law, he said. The Senate bill does not include the accounting exemptions.
"I believe the votes are there whether I like it or not," said Frank, who opposed the amendment in his committee to add the exemptions.
A proposal he offered on the House floor to strip the provision failed by a large margin.
The exemptions for smaller businesses were pushed by Reps. Scott Garrett, R-N.J., and John Adler, D-N.J., The provision would permanently exempt companies with market capitalizations of less than $75 million from the audit requirements.
Frank also said that a Senate provision written by Sen. Charles Schumer, D-N.Y., to empower the Securities and Exchange Commission to fund itself through fees, freeing it from annual congressional appropriations, could be altered to preserve a role for the appropriations committees.
"The appropriations committee gets very upset about that," he said. He suggested that a compromise could allow some self-funding authority to the SEC but keep the appropriators involved.
Furthermore, Frank said, the final reform bill will include some version of language designed to give the SEC explicit authority to write a rule giving shareholders easier access to corporate voting.
He said, however, that it is still "up in the air" whether negotiators will include a specific rule granting shareholders so-called "proxy access" or a provision along the lines of the House language, which Frank said removed "any doubt that the SEC has the ability to do that."