WASHINGTON — The Federal Reserve Board's recent delay of the Volcker Rule compliance deadline is sparking concern among critics that the move sets the stage for yet another congressional battle to weaken the Dodd-Frank Act.

The central bank announced last month that institutions — challenged by the difficulty of divesting holdings in time — will get another two years, to 2017, to unwind private equity and hedge fund investments outlawed by the Dodd-Frank provision.

But with the industry's yearend success beating back the law's separate "swaps push-out" — which had previously been subject to an implementation delay — some say banks will use the extra time they have to conform as an opportunity to push legislation to kill or roll back key parts of the Volcker Rule.

"Every day a financial reform rule is not finalized and implemented is just another day for Wall Street's biggest banks to weaken it further if not prevent it from being applied at all," said Dennis Kelleher, chief executive of Better Markets.

For their part, industry representatives say the purpose of the extension — which was specifically enabled by the Dodd-Frank law — is to allow a more orderly implementation of the rule and prevent market shocks, not to upend the ban.

"The idea that the" extension is meant to try and do more lobbying "is not true. It's about how do we get this implemented correctly," said Francis Creighton, executive vice president for the Financial Services Roundtable. "Institutions need a reasonable timeframe to avoid fire-sales on these investments."

Yet others say that, as members of both parties in the new Congress explore possible changes to Dodd-Frank as a whole, the two-year reprieve on Volcker Rule compliance gives lawmakers a greater chance to make revisions to the trading ban part of that conversation. Indeed, 29 House Democrats joined the GOP last week in easing the compliance schedule for conforming collateralized loan obligations to the rule.

Allowing time for legislative changes "was not the intention of the regulators and not the intention of the industry either," James Ballentine, executive vice president of congressional relations and political for the American Bankers Association, said of the Fed's extension. "But as Congress looks at the totality of Dodd-Frank, the Volcker Rule is an important piece of that and whether they look at it in its entirety or pieces of it, that's certainly something that the two-year period will allow for.

"There will not be an effort where" industry representatives "are marching to the Hill every day to change Volcker," Ballentine added. "But as things become apparent to the institutions, we'll make it known to both members of Congress and to regulators if changes need to be made. This is not a concerted effort to undercut or change it. But as issues become evident to us, we will certainly make it known to members of Congress and to the regulatory agencies during that two-year period."

Five agencies finished the Volcker Rule regulations in December 2013. Originally, the law gave banks until July 2014 to comply, but it also granted the central bank power to grant three additional one-year delays. Following an initial extension to July 2015, the Fed in December said it would allow the industry until July 2016 to be in compliance with the portion of the rule that bans investment in "covered funds," but only for funds held before Dec. 31, 2013. The extension does not apply to strict proprietary trading.

The Fed said it also intended next year to grant a third and final delay for covered funds to July 2017. In an entirely separate move, the central bank had earlier delayed compliance with unwinding CLOs until that same year. The bill passing the House Wednesday — which the White House has said President Obama will veto — would extend the CLO-related compliance to 2019.

Meanwhile, under prior regulation the Fed can consider bank request applications — due later this month — for an additional five-year delay on conforming "illiquid" funds. That means some areas of banks' portfolios may not be in compliance until 2022.

"Fundamentally, we're not looking to repeal the Volcker Rule. … The key thing is: how do we help our institutions comply in an effective and real way?" said Creighton. "This is really complicated. You want to get it right."

But the Fed's December decision drew immediate criticism, including from fellow regulators and even former Fed Chair Paul Volcker, who originally suggested the provision later dubbed in his honor.

"It is striking that the world's leading investment bankers, noted for their cleverness and agility in advising clients on how to restructure companies and even industries however complicated, apparently can't manage the orderly reorganization of their own activities in more than five years," Volcker said in a statement last month. "Or, do I understand that lobbying is eternal, and by 2017 or beyond, the expectation can be fostered that the law itself can be changed?"

In an interview, Thomas Hoenig, the vice chairman of the Federal Deposit Insurance Corp., agreed that "there is every reason to expect that the companies would be ready and able to comply without an extension." (The FDIC was one of the five agencies that drafted the Volcker regulation.)

Hoenig said an industry attempt to use the extra time to lobby for legislative changes is only inevitable.

"I can't go into [banks'] strategies … but by delaying it, you do give it more time," he said. "That's a fact. … There is no question, given the experience we had with the push-out rule, that there are going to be lobbying efforts to delay or repeal it. It is a risk."

The never-ending debate over Dodd-Frank intensified toward the end of 2014 as the industry successfully inserted language in a comprehensive spending bill dealing with the swaps measure. Dodd-Frank had required banks to move swaps-related activities outside of their FDIC-insured subsidiaries, but the spending bill — which was signed into law — significantly rolled back the push-out.

Some observers said an even bigger battle could spill out over the Volcker Rule.

"This is where the money is. It's not the push-out rule. … I've always believed the big focus is the Volcker Rule," said Mayra Rodríguez Valladares, managing principal at MRV Associates. "Do I think the banks are going to be pushing as much as they can to make revisions or at least delaying [the rule more]? Absolutely."

But even those who expect the issue to play out more on Capitol Hill say banks really do need more time to comply.

"The delays are also about the banks being unprepared to implement the rule," Valladares said. "All of these banks have a diversity of problems. It's not that all of them have the same exact problem."

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