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Volcker Rule Attacked

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An official of TIAA-CREF testified before a House panel today that the proposed regulation providing a limited exemption for life insurance companies from the so-called Volcker rule is an area of concern to the industry because it does not appear to reflect legislative intent.

Scott Evans, executive vice president, TIAA-CREF president of asset management, said the problem with the proposed rule as currently structured is that it does not expressly allow the general account of an insurance company to hold an ownership interest in a so-called “covered fund.”

In addition, Evans said, the proposal defines covered funds in a way that essentially designates all private equity funds as covered funds.

“This is an area of concern not only to TIAA-CREF, but to many in the insurance industry since private equity investments are widely utilized by insurers’ to diversify investment portfolios, both for the benefit of their general accounts and on behalf of customers,” Evans said.

Evans testified at a hearing examining the impact of the Volcker rule on markets, businesses, investors and job creation.

The hearing was held by the  Subcommittees on Capital Markets and Government Sponsored Entities and Financial Institutions and Consumer Credit of the House Financial Services Committee.

The Volcker rule is contained in the Dodd-Frank financial services reform law. It would reduce the ability of the nation’s largest financial institutions from making large investments that could produce large losses.

It was proposed by Paul Volcker, 84, chairman of the Federal Reserve Board during the Carter and Reagan administrations, while he was serving as an advisor to President Obama in 2009-2010.

In testimony today, trade groups, including the Securities Industry and Financial Markets Association, argued that the narrow definition of what’s allowed under the proposal will curtail the role of banks as market-makers.

This will prevent them from purchasing securities clients want to sell without first finding a buyer, witnesses said. That could reduce liquidity and increase transaction costs for companies, according to a study released last month that was commissioned by the financial services industry.

In testimony today, Federal Reserve Gov. Daniel Tarullo said regulators are having problems writing the rule in such a way that it didn’t restrict permitted trades and yet caught prohibited ones.

He said the agency is “more than open” to alternatives to its proposed approach, saying regulators are striving to avoid complexity. “The approach taken in the proposed rulemaking is concededly not a simple one,” he said.

Acting Comptroller of the Currency, John Walsh, testified that banks without U.S. operations could benefit from the rule, saying that foreign jurisdictions “have not adopted restrictions resembling those in the Volcker rule.”

“U.S. banks competing with these foreign banks will operate at a competitive disadvantage,” Walsh said.

In his testimony, TIAA-CREF’s Evans defended private equity investments undertaken by insurers.

He said they generally offer a long-term investment horizon and are an integral tool for ensuring adequate returns and higher yields for policyholders and customers, “which is particularly important in the current low interest rate environment.”

In addition, Evans said, many private equity investments provide necessary long-term capital to important sectors of the economy, including infrastructure projects to build roads, airports, wind farms, and other renewable energy projects, fueling jobs and growth.

Evans said TIAA-CREF believes that the provision in the DFA providing a limited exemption for insurers was aimed at “providing insurance companies greater latitude in their ability to sponsor and invest in covered funds than other banking entities.”

Evans said the insurance industry believes the rule should allow insurance companies to sponsor and invest in private funds without regard to the investment limits imposed on other banking entities engaged in similar activities, subject to regulation in accordance with applicable insurance company investment laws.

However, the proposed rulemaking does not expressly do that, Evans said.