WASHINGTON — Several federal agencies on Tuesday approved a Volcker Rule that includes an expanded exemption for municipal securities, something market participants lobbied for after an earlier version of the rule failed to exempt certain types of muni debt from the rule's ban on proprietary trading.
The Securities and Exchange Commission and other federal agencies cooperated on the rule, which is mandated by the Dodd-Frank Act.
The rule would restrict an insured depository institution and its affiliates from: engaging in proprietary trading; acquiring or retaining any equity, partnership, or other ownership interest in a hedge fund or private equity fund; and sponsoring a hedge fund or a private equity fund. A draft rule published in Oct. 11 exempted municipal securities from these trading restrictions, but included only direct state and local debt.
The final rule includes a broadened exemption for states, localities, subdivisions, and agencies of muni issuers.
John Ramsay, the SEC's acting director of the division of trading and markets, said the agency was aware of comments from the muni market urging that all municipals be exempt from the trading restrictions, and acted in altering the definition of munis in the rule to allay the concerns those comments expressed.
"We have clarified and expanded that piece in order to account for that," Ramsay said.
The SEC approved the rule by a 3-2 vote, with the two Republican commissioners, Daniel Gallagher and Michael Piwowar, opposing.
Bond Dealers of America president and chief executive officer Mike Nicholas applauded the move, but said the rule is still under evaluation. The rule includes a more than 800-page preamble in addition to a roughly 70 page statute.
"BDA's members continue to review the final rule for all of its implications for investors, with an eye toward the delicate balance that must be struck between liquidity in the fixed income market and investor protections," Nicholas said. "So far, we can say that a key BDA recommendation has been addressed as in a significant improvement over the proposed rule, the final rule ensures that all state and local government securities are excluded from the proprietary trading ban, not just general obligation bonds. We commend the regulators for taking this step to ensure that liquidity in the municipal securities market is not unduly impaired."
Securities Industry and Financial Markets Association president Kenneth Bentsen said the exemption was the right call, but that SIFMA is also looking into other concerns.
"SIFMA believes excluding agency and instrumentality bonds from the final Volcker rule issued today was the correct course of action. Had all municipal bonds not been excluded from the Rule, the result would have been a more difficult environment for communities raising capital and decreased liquidity in the municipal market. We are reviewing with members the impact on tender option bond programs not receiving a specific exemption from the definition of 'covered funds'."
The Municipal Securities Rulemaking Board, which submitted comments to the SEC supporting a muni exemption, was also pleased.
"The MSRB is pleased that the federal financial regulators agreed with the MSRB's analysis and amended the initial proposal to avoid an unnecessary bifurcation of the municipal market," said MSRB chair Dan Heimowitz. "Exemption of all municipal securities as defined by the Securities Exchange Act ensures that the municipal market will not be splintered unnecessarily as a result of the Volcker Rule."
Senate Banking Committee chairman Tim Johnson, D-S.D., said the approval marked an improvement in the banking system, precisely the goal of lawmakers in passing the Volcker rule in the aftermath of the financial crisis.
"Today's approval of the final Volcker Rule is a key milestone in the full implementation of Wall Street reform and these trading restrictions will help improve the integrity of our banking system, Johnson said. " I commend all the individuals involved in this monumental effort for the many years of dedication, hard work and inter-agency cooperation that led to today's joint announcement, and I look forward to reviewing the details of this important rule."
But American Bankers Association president and chief executive officer Frank Keating said the final rule still raises concerns.
"We appreciate regulators' earnest attempts to develop workable regulations for a rule that's ultimately unworkable in the U.S. marketplace." he said. "Unfortunately, the Volcker Rule will still make it too hard in too many cases for bankers to provide services that many bank customers rely upon every day, posing no risk to the financial system."
"We trust the regulatory agencies will work together to expend similar efforts in helping banks and customers who are affected, and will be willing to adjust the rule as experience proves it is necessary," he said.
House Financial Services Committee chairman Jeb Hensarling, R-Tex., also criticized the rule, saying "The Volcker Rule is just the latest example of Washington's regulatory overkill that ends up hurting more than it helps."
