U.S. News

Behind The Scenes, Some Lawmakers Lobby to Change The Volcker Rule

Ben Protess|The New York Times

As regulators put the finishing touches on new rules for Wall Street, they remain entangled in a partisan fight over the overhaul.

United States Federal Reserve
Tetra Images | Getty Images

In public letters and closed-door meetings, more than 100 lawmakers have lobbied the Federal Reserve and other authorities over the Volcker Rule, records show. The rule, intended to restrict banks from placing risky trades and investing with hedge funds, has drawn an outcry from Republicans who want to mute its effect and some Democrats who want to strengthen it.

The wrangling has been on display at public hearings and in letters posted on regulatory Web sites. Still, some lawmakers have applied pressure behind the scenes.

Internal government documents provide a glimpse of one such lobbying effort last year, when an aide to Senator Scott Brown, Republican of Massachusetts, appealed to the Treasury Department and the Federal Reserve.

The documents show a back-and-forth between the Fed's top lawyer and Mr. Brown's staff. "I have a very urgent request," Nathaniel Hoopes, Mr. Brown's aide, wrote in an April 2011 e-mail. Seeking to fine-tune an exemption, he argued that a broad range of bank customers should be allowed to invest with hedge funds under the Volcker Rule. "My boss has been hearing it from constituents," he added, referring to the rule's impact on Massachusetts-based financial firms.

In a first draft of the rule released last fall, regulators agreed with that broad definition. In response to Mr. Hoopes's e-mail, the Fed's general counsel, Scott G. Alvarez, acknowledged that "there are many difficult issues raised by the ." In another e-mail, Mr. Alvarez encouraged Mr. Brown's office to publicly voice its concerns, according to interviews with government officials and the documents. The Fed initially released the documents to a Democratic aide who obtained them through a public records inquiry.

In a statement, the Fed said that it routinely "seeks comment from the public and all interested parties on our rule-makings and carefully evaluates and weighs each comment."

The Fed, like all regulators, provides feedback to lawmakers and has held several meetings with advocacy groups that support the Volcker Rule, including Americans for Financial Reform.

Still, the e-mails—while not improper or unusual—show that such discussions are not always public. The exchange with Mr. Hoopes came months before regulators opened a public comment period or even publicly released a draft version of the Volcker Rule.

The e-mails also indicate how, even after passing the Dodd-Frank Act, some lawmakers are still tinkering with its machinery.

Mr. Hoopes, who previously worked for an arm of Lehman Brothers, also pressed his case with the Treasury Department. In an e-mail to a Treasury official, he said, "This should be very simple and straightforward and I think the Fed is over-complicating it."(The Boston Globe first reported about the e-mail this summer.)

Republican State Sen. Scott Brown exits the debate hall following a senatorial debate at the University of Massachusetts January 11, 2010 in Boston.
Darren McCollester | Getty Images

Mr. Brown, one of three Republicans to vote for Dodd-Frank, is in a tight re-election fight with Elizabeth Warren, a Democrat. She made her name in Washington as a fierce critic of Wall Street and supporter of changes like the Volcker Rule.

The partisan haggling over the rule affects a number of regulators. But much of the pressure has centered on the Fed, where some lawyers have questioned whether the rule is too burdensome for Wall Street, according to government officials briefed on the matter. Officials spoke on the condition of anonymity because the rule-writing process is private.

"The Volcker Rule regulations have unfortunately been long delayed, obviously in my mind because the agencies are having difficulties reaching agreement," said Michael Bradfield, the former general counsel at the Fed. "The well-known skepticism of some in the Fed about the workability of the Volcker Rule has undoubtedly contributed to this situation."

Few rules present a greater challenge—or have provoked more political squabbling—than this one. Named for Paul A. Volcker, a former Fed chairman who campaigned for the rule, it aims to curb the sort of risk-taking that led to government bailouts in the financial crisis. The rule would largely prevent banks from making bets with their own money, a practice known as proprietary trading. It would also limit how banks invest in hedge funds.

But a draft proposal, released last fall, granted several broad exemptions to the proprietary trading ban. Regulators recently entered a final stage of rule-writing after a group of lawyers from the Fed and other agencies ironed out concerns over several exemptions, according to people briefed on the matter. While regulators initially hoped to complete the rule by September, the people said, they now expect a final version around the November election.

Several Democrats, echoing the antibank animus of the election season, have pushed the Fed to narrow the Volcker Rule exemptions.

Some regulators have stepped up their focus on the rule, too.

Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, which is helping to write the overhaul, said in a letter to the Fed last week that certain exemptions would "significantly undercut the fundamental purposes of the rule."

Republican lawmakers counter that Dodd-Frank could jeopardize an already anemic economic recovery.

Mr. Brown, whose donors include major mutual funds like Fidelity, has been particularly vocal.

He supported the Volcker Rule after chipping away at one of its core tenets. During the debate on Capitol Hill, Mr. Brown championed an exemption that allowed banks to invest up to a 3 percent stake in hedge funds. Banks can also offer hedge fund investments to outside investors like pension funds.

Now, Mr. Brown is fighting over the details of the exemption. While Democrats want to restrict access to customers who already have an account with the bank, Mr. Brown wants to expand the definition of "qualified investors."

A spokeswoman for Mr. Brown said he was "proud to cast the deciding vote" for Dodd-Frank and that he worked "to protect Massachusetts jobs."

In his lobbying, Mr. Hoopes first appealed to the Treasury Department, but then took his concerns to the Fed. A "narrow definition," Mr. Hoopes warned in an April 2011 e-mail to the Fed, "was not intended for this purpose" and would shift money to unregulated pockets of the market.

In reply, Mr. Alvarez of the Fed suggested that Mr. Brown file a public comment letter. "Others have been commenting on various ways we should interpret the statute, and we would consider very carefully any comment from you as well," Mr. Alvarez wrote.

What happened next is unclear. While Mr. Hoopes had a brief phone call with the Fed, people briefed on the matter said, no one can recall specifics or whether Volcker was even discussed.

Mr. Hoopes soon filed a comment letter and thanked Mr. Alvarez "for all the quick responses to my questions, etc." It is unclear to what questions Mr. Hoopes was referring.

This story originally appeared in The New York Times