Senator Webb is calling for regulations to curb proprietary trading and conflicts of interest on Wall Street. Here is a press release from the Senator’s Office:
Senator Jim Webb (D-VA), a member of the Joint Economic Committee, called on federal regulators to implement strong reforms to prevent high-risk investing from again endangering the national economy. Sen. Webb joined 17 other senators in submitting comments to the Financial Stability Oversight Council (FSOC) yesterday to ensure that proprietary trading restrictions of the Restoring American Financial Stability Act are implemented as intended by Congress.
“After taxpayers were forced to bail out banks and other systemically significant financial companies whose proprietary trades went awry, we determined that the economy and taxpayers need strong protections against an increasingly casino-like financial system,” the senators wrote. “High-risk investing is an appropriate and legitimate activity in a free market system, but it cannot again imperil our nation’s economic well-being.”
The restrictions were added to the financial reform law to address speculative proprietary trading by bank fund managers, which creates tremendous risks for the institutions themselves and conflicts with the interests of their customers. The group of senators provided detailed guidance to regulators to help them effectively implement and enforce the statutory language. The group also provided copies of the implementation instructions to the heads of the federal agencies responsible for implementing Wall Street reform.
The FSOC is a collaborative body established as part of the financial reform legislation to monitor and address risks to financial stability. The FSOC is chaired by the Secretary of the Treasury and authorized to facilitate regulatory coordination, recommend stricter standards, and break up firms that pose a “grave threat” to financial stability, among other responsibilities. The FSOC is currently requesting comments regarding the implementation of the Merkley-Levin provisions to restrict proprietary trading, also known as the “Volker Rule.” Sen. Webb cosponsored the Merkley-Levin provision during the Senate floor debate on financial reform.
“Despite having just emerged as a nation from the worst financial crisis since the Great Depression, powerful interests will seek to weaken the Merkley-Levin Volcker Rule protections,” the senators wrote. “We in Congress resisted those efforts and provided you with a clear mandate and broad authority to act. The American people are now relying upon you to fully carry out the law.”
The text of the letter follows:
Dear Members of the Financial Stability Oversight Council:
The Dodd-Frank Wall Street Reform and Consumer Protection Act sets forth a clear mandate to end high-risk, conflict-ridden financial activities at our nation’s banks and systemically significant nonbank financial companies. It does so by ending proprietary trading within our nation’s banking entities, limiting their relationships with hedge funds and private equity funds, and restricting such activities at systemically significant nonbank financial companies, as well as explicitly prohibiting conflicts of interest.
As co-sponsors of the Merkley-Levin Amendment, which ultimately became Section 619 of the Dodd-Frank Act, we urge the Financial Stability Oversight Council (FSOC) to provide guidance to regulators that can help them effectively implement and enforce the statutory language as Congress intended.
After taxpayers were forced to bail out banks and other systemically significant financial companies whose proprietary trades went awry, we determined that the economy and taxpayers need strong protections against an increasingly casino-like financial system. High-risk investing is an appropriate and legitimate activity in a free market system, but it cannot again imperil our nation’s economic well-being.
To ensure that the Merkley-Levin proprietary trading restrictions (also called the “Volcker Rule”) are most effectively applied, Section 619 directs the FSOC to conduct a study and make recommendations on how to best implement its provisions. (Bank Holding Company Act of 1956 (12 U.S.C. 1841 et. seq.), §13(b), as added by the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, §619 (2010).) As one of the FSOC’s initial tasks, this study will be a critical test of whether the FSOC lives up to its statutory mandate of independence, regulatory cooperation, and professional analysis. We hope that each member of the FSOC, voting and non-voting, will participate fully in this effort.
In crafting recommendations to ensure the Merkley-Levin provisions are implemented as intended, the FSOC will undoubtedly need to address many issues. We would like to focus your attention, however, on a few critical points:
· The term “trading account” should cover all types of accounts that may be used to conduct proprietary trading.
· The extent of permitted activities, particularly “market making” and “risk mitigating hedging,” should be strictly and clearly delineated to ensure that high-risk proprietary trading stops, while economically beneficial and risk-reducing activities continue. Capital charges governing these permitted activities should also be vigorous enough to protect the economy and U.S. taxpayers from risks arising from them.
· The relationships between covered financial firms and the private funds they manage or sponsor should be carefully circumscribed to prevent those private funds from being used to circumvent the law’s limits.
· The terms “material conflicts of interest” and “high risk” assets and trading strategies need to be meaningfully defined so as to safeguard U.S. taxpayers from unfair practices and systemic risk.
· Capital charges and quantitative limits for systemically significant nonbank financial companies should be vigorous so as both to discourage and to reduce the risks and conflicts of interest from proprietary trading at these entities.
· The law’s anti-evasion provisions should be implemented in a way to ensure regulators have clear authority to prevent abusive and evasive tactics from undermining the Merkley-Levin provisions.
Implementing these provisions also means establishing a regulatory structure capable of meaningful enforcement. We urge you to consider recommending a two-tiered, cooperative regulatory structure. At the first tier, regulators should conduct real-time monitoring and enforcement. Trading and markets regulators, such as the Securities and Exchange Commission and Commodity Futures Trading Commission, may be in the best position to take a leadership role in monitoring trading and positions, much like they do for insider trading, position limits, and other trading provisions. The newly-created Office of Financial Research may assist in standardizing the data collection and review efforts. At the second tier, regulators should review firms’ policies and procedures and conduct in-depth portfolio-level examinations. Banking regulators, such as the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Federal Reserve Board, may be in the best position to conduct these broader reviews of firms. This type of two-tiered, cooperative approach would enable regulators to share the implementation burdens and also play to their traditional strengths.
You have been assigned to a vital task: to protect the American people from a financial system that has too often been distorted by proprietary trading practices and conflicts of interest that placed a firm’s own interests ahead of the interests of its clients. We recognize that reining in these practices will not be easy. Despite having just emerged as a nation from the worst financial crisis since the Great Depression, powerful interests will seek to weaken the Merkley-Levin Volcker Rule protections. We in Congress resisted those efforts and provided you with a clear mandate and broad authority to act. The American people are now relying upon you to fully carry out the law.
Thank you for this opportunity to comment on the FSOC study to implement Dodd-Frank Section 619.