Skip ahead to page 310 of the Occupy the SEC comment letter on the Volcker Rule, and there you will find Annexure B: a list of suggested changes to one of the most controversial components of the Dodd-Frank financial reform legislation.
The 325-page missive is not presumptuous or empty posturing. The Occupy Wall Street offshoot that wrote the letter is comprised of experts in corporate law and finance—some of them former Wall Streeters themselves.
In detailing how they believe the Volcker Rule can be strengthened, Occupy the SEC has written what may be the longest and most talked-about letter of this comment period, which concluded February 13. From Slate and Mother Jones to Bloomberg, Reuters, and the Wall Street Journal, Occupy the SEC’s doorstopper dispatch to the Securities and Exchange Commission has garnered mega attention this week, helping to define the ongoing debate over the so-called Volcker Rule, a regulation to limit the bets that banks can make through proprietary trading.
“I wasn’t sure if financial regulatory comment letters really got much coverage,” says co-author Caitlin Kline, a former derivatives trader at an investment bank, “but it’s pretty promising.”
The proposed rule—which has been lambasted both for being too restrictive on banks and not strict enough—is supposed to take effect in July. Ever since a draft of the original proposal first leaked in September, it has generated no shortage of commentary. (Even the rule’s namesake—former Federal Reserve chairman Paul Volcker, who supports a strong version of the regulation—has called it “much more complicated” than he would like to see). It has drawn the most public comments of any section of Dodd-Frank thus far, with more than 16,500 comments submitted to the SEC.
Occupy the SEC member Akshat Tewary, an attorney, says the number of comments owes to how much is on the line for bankers and the public at large: The rule “has the potential to pretty much transform the entire banking industry. So there’s a lot of money at stake, and also there’s a lot of risk that can be reduced through rigorous enforcement of the Volcker Rule.”
But it has been Occupy the SEC’s letter that has stood out from the rest in the media sphere, being widely praised this week as smart, well-written, and detailed. The letter identifies risky proprietary trading with government-backed funds as the downfall that occasioned the 2008 financial meltdown, and argues that a stronger Volcker Rule must keep that from happening again—sentiments echoed by John Reed, the former chairman and CEO of Citigroup in a five-page comment letter he submitted.
Typically the terrain of lawyers and industry, it’s perhaps no wonder that Tewary came up with the initial idea for parsing the Volcker Rule via the public comment process. Tewary, who has a background in corporate law, was already writing a comment letter about another section of Dodd-Frank when he began attending Occupy Wall Street events in lower Manhattan last fall.
“There seemed to be a natural mesh between the two—between the energy of Occupy Wall Street and the opportunity to actually make some real change through the comment letter process,” he says. The group does not formally speak for Occupy Wall Street.
Over the next several months, a core group of seven members met regularly in “book club” fashion to review the rule. They discussed their ideas in an atrium of a building on Wall Street. They held a call with SEC staff to clarify certain questions posed by regulators. And then they spent six weeks drafting and writing the finished product, which responds to 244 of regulators’ 395 questions about how the rule is written.
“This country’s governing principles of transparency and due process mandate that any rules implemented by our regulators comport with the democratically elected legislature’s intention to protect the people from the widespread banking abuses and excesses of the recent past,” the authors write. “We believe the Volcker Rule is important to the future of the banking industry and, if strongly enforced, will help move our financial system in a more fair, transparent, and sustainable direction.”
The Occupy the SEC letter also reflects some of the authors’ own experiences on Wall Street, such as arguments that compliance and risk management should be more central to the industry, and that compliance officers should be better compensated.
“One of our themes is that compliance is very, very important, and the best thing would be a culture that actually respected it, where it was able to do the job that it’s supposed to do,” says Kline. “It’s one of the most important regulatory tools that exists within banks, and it needs to be treated that way.”
Among the authors themselves, their favorite sections include those on market making, the repo exclusion, conflicts of interest, and, of course, Annexure B, a summary of the phrases Occupy the SEC thinks should be changed, added, or struck in order to make the rule workable.
Tewary says that, ideally, the group would liked to have seen a statute with fewer loopholes to begin with. But for now, a key aspect of the approach Occupy the SEC is taking is working within the legal framework that Dodd-Frank has established. “Practically speaking, we’re tied to what Dodd-Frank Section 619 says,” notes Tewary. “Now it’s sort of a triage situation where we’re trying to avoid any further dilution, which inevitably will happen unless there’s a strong voice counterbalancing the banking industry.”
The media attention, in the meantime, doesn’t hurt, says Tewary, as Occupy the SEC waits to see how regulatory agencies will respond: “It’s a battle for the hearts and minds of the regulators.”
See also: “Tracking the Pace of Dodd-Frank Rulemaking for 2012,” CorpCounsel, January 2012.
