WASHINGTON — In technical terms, Congress handed regulators the baton a while ago to implement 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 with the bigger reforms 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, while 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. 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," said Margaret Tahyar, a partner at Davis Polk & Wardwell.
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 Feb. 13. (A longer period was in discussion before the letter.)
Congressional review of the implementation process will likely not end there. A House hearing on the plan is expected later this month, and 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 Capitol Hill staffer.
"Going into an election year, it plays to both sides," Gardner continued. "When the MF Global crisis hit, Sens. Merkley and Levin jumped on it, suggesting that it was proof that the Volcker Rule had to be strengthened and not weakened. … As the election year plays out, I suspect we will hear more from them."
But a continued role for Congress well after Dodd-Frank passed may also be pragmatic, rather than just political.
"In the case of the Volcker Rule … it's a whole new statute with broad implications for the functioning of capital markets," said Kenneth Bentsen, a former Texas Democratic congressman and now executive vice president for public policy and advocacy for the Securities Industry and Financial Markets Association. "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 idea — 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 300-page proposal was too complex, perhaps because the law can be read with multiple interpretations.
"When a proposed rule could have a big impact on the markets, the regulators have been sensitive to the arguments of industry and Congress, and the Volcker Rule is no exception," said a congressional aide, who spoke on the condition of anonymity.
"The Volcker Rule could be interpreted in a way that fundamentally transforms the trading markets, and it could also be interpreted in a way that doesn't change trading at all but substantially increases compliance costs," the aide said. "Institutions would get to do essentially what they do today, but regulators would at least have a better idea of what those institutions are doing."
Some say the trading restrictions appear to cut two ways. On one hand the new policy severely constrains a bank's trading capability. But 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 subject to the ban to worry about compliance.
"It has an inherent contradiction in it. It says: 'Do … , but don't do … ' " Tahyar said. "Because the exceptions are described as 'permitted activities,' everything a banking entity does must fit within a permitted activity. There are all kinds of traditional banking activities that are stuck in the haze of whether they are permitted or not."
Experts said clarity from Capitol Hill about what lawmakers intended will help regulators draft the regulation.
"To me 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 stature 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 OK."
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.
"Involvement can be writing to agency heads and letting them know what they think the objectives of the Volcker Rule were. They don't have to go through any extensive legal memorandum," said Timothy Keehan, senior counsel for the American Bankers Association's Center for Securities, Trust and Investments. "They may be just a one-, two- or three-page letter signed by one or two congressmen or senators."
Observers said lawmakers were also heavily involved — without any legislative changes — in two recent regulatory initiatives: an effort by the Department of Labor to adjust the definition of "fiduciary" under the Employee Retirement Income Security Act, and a Dodd-Frank regulation by the Commodity Futures Trading Commission setting position limits for futures contracts.
In the case of the Labor Department rule, Keehan said, "it started with letters, and then they held a subcommittee hearing, and based on that hearing there were more letters.
Rep. "Barney Frank himself sent a letter directly to the Labor secretary saying that the regulation was not a good idea," Keehan said. "The Department of Labor backed off of the rule."
But others said 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."