Groups representing community banks and bank directors are aggressively objecting to a provision in the Volcker Rule requiring banks to shed trust-preferred securities.

The American Association of Bank Directors and the Independent Community Bankers of America claim that the requirement, which would be enforced starting in July 2015, would lower banks' capital to dangerous levels.

The groups wrote in letters this week to federal agencies that the rule seems to force banks to make accounting adjustments by the end of this year.

The directors' group cited analysis that banks should be required to shed trust-preferred holdings only if they are determined to serve as an equity interest. In most cases, those securities are not considered, David Baris, a lawyer at BuckleySandler and the directors' association's executive director, wrote.

"If the Trups investment is not tantamount to an equity interest, then the investment would not be subject to divestiture," Baris added.

The Volcker Rule is intended to "promote safety and soundness and minimize risk for the banking industry," Baris wrote. "Forcing a divestiture of investments in Trups and causing a substantial reduction in capital has the opposite effect."

The American Association of Bank Directors also asked regulators to suspend the rule, as it applies to trust-preferred securities, until the guidance is reconsidered and finalized.

The groups sent the letters to the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve Board. The FDIC and Fed declined to comment. The OCC did not respond to a request for comment.

"Really, these are debt securities" rather than equity, Baris said in an interview. "They have interest rates. The amount to be repaid doesn't change. That doesn't make them like equity investments, under normal standards."

The final version of the Volcker Rule of the Dodd-Frank Act, which bans proprietary trading by big banks, was issued last week. Since its release, at least three banks have announced plans to comply with the rule by selling various securities: BankUnited (BKU) in Miami Lakes, Fla.; Cape Bancorp (CBNJ) in Cape May Courthouse, N.J.; and Zions Bancorp (ZION) in Salt Lake City, Utah.

"The intent of the Volcker Rule was to prohibit proprietary trading by the large banks and the ownership of hedge funds and private equity funds," Camden Fine, the ICBA's president and CEO, wrote. "How did this intent ever evolve into including the divestiture of legitimate portfolio holdings of community banks?"

The ICBA and American Association of Bank Directors have estimated the rule could harm hundreds of community banks. "We don't believe that the issue only affects a small number of community banks," Baris wrote.

The American Bankers Association contacted regulators, saying the Volcker Rule would have unintended consequences. "Banks from all across the nation are affected in ways that we are confident were not the purpose of the Volcker Rule," the ABA said in an unsigned letter sent Wednesday.

Richard Whiting, executive director of the Financial Services Roundtable, also submitted a letter to regulators this week, objecting to the provision.

"I urge you to issue interpretive guidance that permits firms that hold such obligations to continue to record them at book value rather than marking them to market," Whiting wrote.

BankUnited said Thursday that it sold a portfolio of collateralized-loan obligations at a $1.4 million loss and $119 million of private-label re-securitized real estate mortgage investment conduits for a $3.8 million gain.

Zions said Monday that it will have to book a $387 million charge tied to its portfolio of collateralized-debt obligations. Zions will sell most of its portfolio of bank and insurance trust-preferred collateralized debt obligations.

Cape Bancorp disclosed in a regulatory filing Thursday that it sold bank and insurance trust-preferred collateralized-debt obligations at an $850,000 loss.

The Volcker Rule differs from the Basel requirement concerning trust-preferred securities, Baris said.

The Volcker Rule deals with trust-preferred holdings issued by collateralized-debt obligations that bought individual bank issuances. In contrast, Basel addresses how certain banks count trust-preferred securities they issued toward capital levels.

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