Some federal regulators have turned against the Volcker Rule
It’s not just big banks and industry lobbyists who’ve had harsh words for the Volcker Rule. In a speech this weekend, Troy Paredes, the lone Republican commissioner on the Securities and Exchange Commission, warned that the proposed regulation “could unduly impede the competitiveness and dynamism of our financial markets and hinder the flow of capital to its most productive purposes at the expense of our country’s economic growth” and he was “very troubled” by such unintended consequences.
Back in October, Paredes had voted with the other SEC commissioners to support the agency’s proposed draft of the rule, although he said at the time that he had “significant reservations.” What changed between now and then? Paredes doesn’t explain directly, but he does cite “the many comments explaining the harm the proposed rule could cause” — the great majority of which have been submitted to federal regulators by industry stakeholders. In listing his specific concerns, Paredes echoes their principal criticisms of Volcker: Liquidity could dry up, driving up trading costs; securities markets could become more volatile; and states and municipalities could have trouble accessing financing.
In fact, other Republican federal regulators have turned against earlier versions of the Volcker Rule: CFTC Commissioners Jill Sommers and Scott O’Malia both voted against their agency’s draft of the regulation in January. “It is an unworkable solution that is entirely too complex and provides the commission with little or no means to enforce or to deter violations of this rule,” O’Malia said at the time. “Obviously we have to comply with the statute and do so in a responsible way, [but] my concern with this fatally flawed rule [is that] this rule does not do that.”
Federal regulators, however, aren’t in a position to junk regulations they don’t like, even if they view them as “fatally flawed”; their job is to implement the laws that are passed, although they have major leeway in deciding how that will be done. As such, Paredes wants regulators to scrap the existing draft of the Volcker Rule and start over. “My present view is that the most appropriate path forward from here would be a reproposal – a fresh start, if you will,” he concluded. “Significant revisions will likely be needed so that whatever benefit might result from the rule does not come at an unacceptably high cost.”
But like his GOP colleagues on the CFTC, Paredes will be outnumbered if his Democratic colleagues on the SEC believe otherwise about Volcker. And even if the federal regulators agreed to re-propose the law, they don’t have the authority to scrap it altogether. That said, such high-profile criticism could also increase momentum to do so among the legislators who can.