Washington — A bipartisan group of senators introduced a bill on Thursday that would delay implementation of the controversial Volcker Rule, a provision in the Dodd-Frank Act that muni market participants have warned could divide the market and increase costs for issuers.
Named after former Federal Reserve chairman Paul Volcker, the rule is set to take effect July 21, two years after the Dodd-Frank Act was signed into law.
The rule would prohibit banks from proprietary trading and would restrict their investments in hedge funds and private equity. Bonds issued by states, counties, and local governments are exempt from the rule, but municipal securities issued by turnpike authorities, water and sewer districts, school districts, and housing authorities are not.
The bill, S. 2223, was introduced by Sen. Mike Crapo, R-Idaho. It would make the Volcker Rule effective 12 months after regulators issue rules implementing it. Banking regulators have proposed one set of rules. The Securities and Exchange Commission and the Commodity Futures Trading Commission have each proposed their own separate rules.
The bill’s co-sponsors included Sens. Mark Warner, D-Va., Pat Toomey, R-Pa., Kay Hagan, D-N.C., Tom Carper, D-Del. and Bob Corker, R-Tenn.
Lawmakers said in a release that the bill will give financial firms time to adjust to the rule and regulators time to consider its implications.
“This bipartisan, targeted legislative fix will remove the artificial compliance deadline of July 21, 2012, and allow the regulators to assess the effect of the proposed rule on the liquidity of the financial markets and the cost of capital,” Crapo said in a release.
Warner said he supports the goals of the Volcker rule, but “these are complex issues and regulators need to get them right and finalize a rule before we ask companies to comply. This modest change would allow time to get the regulations right and make sure stakeholders understand them instead of being forced to guess what the final rules might look like.”
Though banks would have two years to comply with the final regulations implementing the Volcker Rule under the Dodd-Frank Act, banks and investment banks have been concerned that some of their activities could become illegal as of July 21.
There also has been speculation regulators would not be able to finish the rule by that deadline, with agencies having gotten 17,000 comments on the rule. The Municipal Securities Rulemaking Board, dealers, and other muni market groups have urged the regulators to exempt all munis from the rule.
Mike Nicholas, chief executive of Bond Dealers of America, said he supports the bill, warning that the Volcker Rule is too “broad in scope.”
He said the rule, though meant to protect investors by prohibiting banks from proprietary trading, would restrict the activities of middle-market dealers that are affiliated with, or owned by, banks, putting those firms at a disadvantage to independent dealers.
Nicholas said 10 of the BDA’s 51 member firms are directly affiliated with commercial banks. He pointed out that most middle-market dealers don’t hold bonds for extended periods, and generally do not hold other, riskier investments either.
The Securities Industry and Financial Markets Association also supports the bill.
“This is a thoughtful, bipartisan recognition of the risks associated with rushing to impose the Volcker Rule in such a way that would impede market making and reduce liquidity and depth from our capital markets,” Kenneth E. Bentsen Jr., executive vice president of public policy and advocacy at SIFMA, said in a release.
BDA and SIFMA have warned that the Volcker Rule could bifurcate the muni market. Groups have also said the rule could increase issuers’ costs and diminish market demand for municipal bonds issued by authorities.
Some regulators were warning this week that their agencies might not meet the July 21 deadline.
Daniel K. Tarullo, member of the Federal Reserve’s board of governors, told the Senate Committee on Banking on Thursday, “There’s a real possibility that we won’t meet the July 21st date.”
Crapo, a member of the Banking Committee, said at that hearing that uncertainty over the final rule has led some firms’ attorneys to recommend their clients begin shutting down banking activities that could become illegal on July 21.
Crapo said the bill provides “clarity to the marketplace and support to the agencies as they move forward with the deadline, to calm the waters and proceed more effectively with the rulemaking process.”