Two top GOP lawmakers told Securities and Exchange Commission Chairwoman Mary Jo White in a recent letter that the agency has violated federal law by failing to conduct “any economic analysis” on the recently adopted Volcker rule, and have asked her to explain to them by Jan. 24 the “legal justification” for the agency’s oversight.
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, along with Rep. Scott Garrett, R-N.J., chairman of the Capital Markets Subcommittee, told White in their Monday letter that the final Volcker rule, adopted by the five federal regulators on Dec. 10, should have undergone an economic analysis.
“Conducting an economic analysis is a well-established legal requirement and both the Administrative Procedure Act and the Federal securities laws require the Commission to conduct a detailed analysis of the likely economic consequences of its rules and to connect these consequences to efficiency, competition and capital formation,” the two lawmakers wrote. “At 932 pages, there is no doubt the Volcker rule will have a significant impact on the U.S. capital markets and the broader economy.”
SEC spokesman John Nester told ThinkAdvisor that the agency “declined comment” on the letter “in advance of our response to the congressmen.”
However, White said in a statement when the rule was adopted that the agency’s economic analysis team played a critical role in rulemaking.
“The specialized economic expertise of the commission staff was critical in assessing many of the economic issues and questions posed in public comments and in developing modifications to the final rule,” she said. Comments on the potential economic effects of the Volcker Rule, White continued, ”were particularly important in shaping revisions that have produced a more tailored and more effective final rule. These comments addressed unintended consequences and offered alternatives for consideration, and these views were taken into account in formulating the final rule.”
The SEC’s purported lack of analysis was raised again during a Wednesday hearing held by the House Financial Services Committee entitled “The Impact of the Volcker Rule on Job Creators, Part I.” The hearing also focused on the unintended consequences of the massive and complicated rule, as well as the conflicting interpretations that could arise from the five regulators who must enforce the rule.
“A final regulation as significant as the final Volcker rule, with broad market impacts and a global reach, will not be simple to implement, examine or supervise,” Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, told the lawmakers during the hearing. “In order to lessen the potential negative market impacts, regulators should consider, as issues arise, giving particular markets or products additional time to comply.”
Bentsen also said that “just as the five regulators ultimately coordinated to write one rule, they must now coordinate and be consistent in their interpretation, examination, supervision and enforcement of the final regulations,” as a “lack of consistency will not only create unnecessary and costly confusion for the industry, our clients and the markets, it will undermine the rule itself.”
Charles Funk, president and CEO of MidWest One Bank, who testified along with Bentsen, agreed that problems could arise because “the regulators can all enforce the Volcker rule differently.”
Said Bentsen: “What happens if the SEC, and its examiners, takes one point of view for the broker-dealer while the OCC takes another point of view for the national bank in the same affiliated institution?”
Bentsen said that the “top near-term goal should be for the agencies to articulate a transparent and consistent roadmap for coordination on both near-term interpretive guidance and the long-term examination and supervisory framework, including realistic goals on quantitative reporting that prioritize utility of the data.”
Because the final regulations are “completely silent on regulatory coordination,” Bentsen continued, SIFMA believes the Financial Stability Oversight Council should “exercise its authority to coordinate supervisory activities with respect to the rule, as Congress provided for in the FSOC’s enabling statute and in the statutory Volcker rule itself.”
Congress should also ensure such coordination among the regulators and “the consistent application of the rule,” Bentsen said, adding that regulators should be “flexible and open to amending the Volcker rule through an iterative process as problems arise going forward.”