Volcker Rule Updates: Possible Exemption for Fund Investments

(Reuters) – Banks may be allowed to maintain small investments in private equity and hedge funds under a U.S. Senate revision of a new rule on bank trading that is otherwise being tightened, aides said on Tuesday.

In the continuing debate on Capitol Hill about Wall Street reform, banks face a turning point on Wednesday when Senate Democrats will spell out how they propose to curb risky trading by banks and their ties to private equity and hedge funds.

Billions of dollars in bank profits hang in the balance, with Democrats walking a political tightrope between cracking down hard on a deeply unpopular industry after a severe credit crisis, and heeding its warnings about taking changes too far.

Senator Christopher Dodd said on Tuesday that he will offer a tightened version of a White House proposal known as the “Volcker rule” that would limit “proprietary trading” by banks for their own accounts that is unrelated to customers.

He told reporters, during a break in negotiations over final regulatory overhaul legislation by a joint Senate-House of Representatives panel, that he would tighten the rule along lines suggested by senators Jeff Merkley and Carl Levin.

“There will be some version of Merkley-Levin I’ll try to offer … We haven’t decided how we’re going to do this yet, but there will be something on Merkley-Levin,” said Dodd, head of the Senate’s negotiating team to the joint panel.

Merkley and Levin want the Volcker rule, which is named after White House economic adviser and former Federal Reserve Chairman Paul Volcker, to be tightened by giving regulators clearer orders on implementing it.

Another provision important to banks — one from Democratic Senator Blanche Lincoln of Arkansas that would force them to spin off their lucrative swap-dealing desks — was expected to be included in the final bill, as well, in revised form, aides said.


Congressional aides said the Volcker rule will likely be further changed to include an exemption that will let banks make small investments in private equity and hedge funds — a carve-out that banks have pushed hard for in recent weeks.

More than one-quarter of all private equity investments between 1983 and 2009 involved bank-affiliated private equity groups, said a recent study by professors at Harvard University and INSEAD, an international graduate business school.

Financial giants such as Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Credit Suisse (CSGN.VX) and Citigroup (C.N) have been deeply involved in private equity deals, the study said.

Banks want an exemption to let them continue to make small, or “de minimis,” investments in funds, which they say is key to their asset management business because it allows them to invest in funds alongside clients they steer into funds.

Lobbyists for Bank of New York Mellon (BK.N), State Street Corp (STT.N) and Northern Trust (NTRS.O) have been especially active in pursuing the issue, aides said.

Critics have questioned the exemption’s logic, however, saying it seems unlikely clients will be convinced that their interests are aligned with their bank’s if its co-investment with them is “de minimis,” or not very important to the bank.

Despite such questions, aides said, Congress is speeding toward the finish line on Wall Street reform and Senate negotiators are wheeling and dealing to make that happen.

“We’re in the fast and furious phase,” one aide said.

Dodd, speaking during a break in proceedings by the joint panel, added that he was “confident” that the final bill, expected to emerge within days from the joint panel, will be able to attract enough votes to win Senate passage.

He also said he would “prefer not” to amend the final bill on the Senate floor.

“If you get into that game, this could be a ping pong match that would last for weeks,” he said. (Reporting by Kevin Drawbaugh; Editing by Jan Paschal)