Lawmakers Stoke Fears of Disjointed Volcker Rule Enforcement

WASHINGTON — Lawmakers raised concerns Wednesday that the five agencies involved in writing the contentious Volcker Rule will be unable to enforce it consistently across the various entities they oversee.

During a House Financial Services Committee hearing featuring top regulatory officials, lawmakers repeatedly returned to the issue, pointedly asking which agency is taking the lead in handling enforcement problems and what happens if there is a dispute.

"Who's in charge? I've yet to hear really who's in charge," said Rep. Shelley Moore Capito, R-W.Va. "Nobody's in charge. So nobody makes a decision. Or you make a decision over one another and then all of the sudden there's three or four decisions that have been made. And how are the institutions supposed to react in the best interest of their client?"

Regulators from the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Securities and Exchange Commission and the Commodity Futures Trading Commission couldn't point to a single entity overseeing the enforcement process.

Instead, they said they've recently formed a working group in the hopes of encouraging consistency in interpretation and enforcement across the multiple agencies.

Left unsaid was that at least some of the problem lies with Congress, which included the proprietary trading ban in the Dodd-Frank Act and required the three banking and two market regulators to work together in writing and implementing the regulation. Inter-agency wrangling was the primary reason it took regulators more than three years to finalize the Volcker Rule late last year.

Still, Rep. Ed Royce, R-Calif., questioned why regulators did not better prepare to coordinate enforcement before the rule was released.

"Why wasn't there a coordinated implementation and enforcement plan developed before the rule was issued?" said Royce. "I think setting up a working group and extending the conformance period clearly does not solve the coordination concerns for this reason."

For their part, regulators said they were working hard on the issue and did not want to see significant rifts in how the individual agencies approached Volcker Rule implementation.

"Compliance and enforcement… is a central issue relating to implementation of the Volcker Rule," said FDIC Chairman Martin Gruenberg. "Ultimately, [it's] going to depend on vigorous oversight and supervision by the agencies. That's why we've made a point of establishing this working group. And I think — and you can ask each of the people at the table here — I think the commitment to effective enforcement is really going to be the key to implementation here."

Under the rule, banks are banned from engaging in proprietary trading but allowed to participate in certain market making activities. The final Volcker Rule, which goes into effect in July 2015, will require the largest banks to provide detailed reports and metrics on any market making activities to ensure they are exempted from the ban.

But banks fear there may be differences in how the agencies interpret such data and how they approach any corrective measures. It was a concern shared by lawmakers on both sides of the political aisle.

"Do you know yet how they're going to coordinate enforcement of the Volcker Rule?" asked Rep. Carolyn Maloney, D-N.Y. "What if one agency thinks that a trade violates the Volcker Rule, but another agency thinks that it's acceptable? How are you going to solve that? Are you working on a memorandum of understanding on enforcement? But what happens if two regulators disagree on an action?"

SEC Chair Mary Jo White said the working group is already trying to wrestle with such questions of coordination, including the feasibility of a single repository for information tied to trading data.

Fed Gov. Daniel Tarullo, echoing White, said the working group would be a "vehicle" for figuring out how to interpret the rule and apply it to an individual institution.

Tarullo also acknowledged concerns that arise from interagency work, but cited how bank regulators have always been able to coordinate and resolve disagreements amicably.

"In my five years at the Fed… rarely does disagreement on that among staff come to my level," said Tarullo. "They're usually able to work it out, and I don't see any reason why that wouldn't be the case with the Volcker Rule as well."

Tarullo left open the possibility of drafting formal guidance, if needed, to help ensure consistency between banking and market regulators. But the challenge facing regulators is complex, considering their different purviews.

"At the end of the day, we have independent agencies, with independent responsibilities," said White. "I think there was an acute awareness — you're hearing it today — from, I think, all the panelists about the need not only to coordinate and reach consistency on interpretive guidance, but also for compliance and enforcement."

Adding to that is the immediate dilemma facing supervisors in how they will distinguish between market-making and hedging activities.

"The thoughtful and effective implementation of the compliance requirements to monitor that activity so that it becomes a routine part of the operations of firms overseen by their responsible regulators really I think is the key challenge here," said Gruenberg. "If we can do that, we should preserve the legitimate activities for the firms and for the markets, and reduce the risk particularly for these large systemic companies. And that, I think, would be a meaningful achievement."