WASHINGTON — Sen. Carl Levin, one of the legislative architects of the Volcker Rule, took sharp issue Wednesday with how regulators are proposing to implement the measure.
During a speech on Capitol Hill, Levin argued that federal regulators are implementing provisions regarding conflicts of interest at investment banks in a weak manner that is inconsistent with the law.
The Volcker Rule, enacted as part of the 2010 Dodd-Frank Act, includes language that addresses instances where banks market and sell a product to their clients while taking a contrary position in the marketplace. Levin explored that issue during a 2010 hearing with Goldman Sachs executives regarding mortgage-related securities they sold to clients.
Under the 298-page proposal, which was released last month by the Federal Reserve Board, the Federal Deposit Insurance Corp., and other financial regulators, certain transactions where banks have conflicts of interest with their customers could be prohibited, but only under specific circumstances.
Banks could evade the ban either by making what the proposal calls a timely and effective disclosure of the conflict of interest to their customers, or by erecting informational barriers within the bank in an effort to protect the customer's interests.
Levin, a Michigan Democrat, was harshly critical of those proposed exceptions.
"That's not nearly tough enough for me," Levin said.
In particular, he expressed skepticism about the idea that requiring disclosure is sufficient.
However, if regulators are going to permit conflicts of interest as long as they're disclosed, Levin said that the banks should not be allowed to bury the disclosure in hard-to-understand language deep inside a long document. Instead, he expressed support for a requirement that the bank's client expressly acknowledge the conflict of interest.
"I would even say, 'You've got to write it out,'" Levin said.
He also expressed concern about the effectiveness of information barriers within banks. In the past, such walls have been erected in an effort to separate the research arm of a bank from its investment bankers.
"Those walls are too easily breached," Levin said. "I never thought they were particularly effective."
Levin's comments came at a forum hosted by Americans for Financial Reform, a group that is pushing for tough implementation of Dodd-Frank.
Sen. Jeff Merkley, D-Ore., also spoke at the event, but did not provide detailed comments about the proposal by regulators to implement the Volcker Rule.
Merkley and Levin worked closely with former Fed Chairman Paul Volcker to draft the legislation, which seeks to wall off FDIC-insured commercial banking from riskier behavior.
Levin indicated that he will submit lengthy comments in response to the regulators' proposal. Such comments are due by Jan. 13.