Friday, June 25, 2010

Senators Retain Volcker Rule

Senators Retain Volcker Rule With Hedge-Fund Leeway (Update3)

By Alison Vekshin

June 24 (Bloomberg) -- Senate negotiators offered changes to the regulatory-overhaul bill that would strengthen part of the language banning proprietary trading at U.S. banks while giving them leeway to invest in private-equity and hedge funds.

The changes proposed today target language in the Senate bill that implements the Volcker rule, named after former Federal Reserve Chairman Paul Volcker and proposed by President Barack Obama in January.

“We think this proposal addresses the underlying concern of putting depository funds at risk through risky activities and puts a stop to proprietary trading, but also recognizes there are legitimate hedging activities that banks need to engage in,” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat who offered the changes and is leading the negotiations for the Senate, said today in a meeting of negotiators.

The proposal Dodd outlined would limit a bank’s investment in private-equity or hedge funds to 3 percent of a fund’s capital. Total investment in private-equity and hedge funds wouldn’t be able to exceed 3 percent of a company’s tangible common equity.

The change softens language in the bill the Senate approved last month, which would have barred banks, their affiliates and holding companies from sponsoring or investing in private-equity or hedge funds.

Conflicts

Dodd said his proposal incorporates a change offered by Democratic Senators Jeff Merkley of Oregon and Carl Levin of Michigan that “more clearly defines the limits on proprietary trading.”

Merkley and Levin proposed writing the ban on proprietary trading into the legislation, replacing language in the Senate bill that would allow regulators to write rules implementing the ban after a study.

In addition, Dodd proposed adding language based on the Merkley-Levin proposal to curb conflicts of interest by preventing firms that underwrite an asset-backed security from placing bets against the security.

The conflict-of-interest provision is aimed at addressing the fraudulent activity alleged in the Securities and Exchange Commission’s lawsuit against Goldman Sachs Group Inc. The SEC is alleging the bank created and sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles.

State Street

The proposal to allow a small investment in private-equity and hedge funds is aimed at retaining support from Massachusetts Senator Scott Brown, one of four Republicans to vote for the Senate bill last month. At least 60 senators will have to approve the bill again before it can be sent to Obama.

Brown has been pressing for changes in language of the Volcker rule to benefit Boston-based State Street Corp., people familiar with the bank’s argument said.

State Street and Bank of New York Mellon Corp. have been lobbying for modifications in the bill. The two banks are concerned that their asset-management activities would be curtailed, since many of their funds could be considered hedge funds although they don’t engage in risky bets, people familiar with the banks’ arguments said.

Senate negotiators will debate the proposal and offer amendments before they approve it and send it to their House counterparts for their consideration.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat who is leading the talks, has said House negotiators will follow the Senate’s lead on the Volcker rule.

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