Occupy the SEC Logo

All my life, two groups have replied to requests for comments from administrative agencies: the corporations governed by the regulations, their trade associations and their lapdog lawyers, all explaining the evil of regulations; and the professional opposition related to the issue, Sierra Club or Planned Parenthood.  Now we can add Occupy the SEC to the group of public interest intervenors.

I am absolutely delighted to see Occupy the SEC file a comprehensive set of comments on the proposed regulations putting the Volcker Rule into effect. As they explain, “The United States aspires to democracy, but no true democracy is attainable when the process is determined by economic power.” I hope dday is right and that they will be around for a long time.


The basic idea of the Volcker Rule as incorporated in the Dodd-Frank financial reform bill is that banks should not be trading securities for their own accounts, taking risks with depositor money at the expense of stability of the financial system. This kind of trading was a direct cause of the Great Crash. Occupy the SEC quotes a former Lehman Bros. executive:

Proprietary trading played a big role in manufacturing the CDOs and other instruments that were at the heart of the financial crisis. … If firms weren’t able to buy up the parts of these deals that wouldn’t sell … the game would have stopped a lot sooner.

Id. at 2, the omitted footnote quotes academics agreeing. Occupy says that when done by too big to fail banks supported by implicit government guarantees, proprietary trading is dangerous to the financial position of average people. Anywhere you look at the economy, you see the evidence of this simple statement.

Occupy offers several impressive criticisms of the proposed regs.

1, The proposed regs are too complicated. There are no bright line tests that clearly and succinctly define prohibited conduct.

2. The proposed regs create an exception for “unintentional” violations. “…[A]pplicable law requires strict compliance and imposes strict liability.” There is no statutory basis for this exception.

3. The proposed regs show great concern about the impact on banks and other corporate persons, but pay little attention to the needs of human beings in their capacities as taxpayers, investors and consumers. The favoritism goes so deep that the agencies “request comment on banking entities and the businesses in which they engage”, without mentioning humans.

4. The proposed regs don’t provide any penalties. Why?

Occupy the SEC explains the necessity of the Volcker Rule:

The passage of the Gramm-Leach-Bliley Act and other deregulatory actions taken by Congress and the financial regulators in the last 15 years have frozen up capital and stultified the economy, especially from the perspective of the average American.

Free from the enforced separation between commercial and investment banking, as originally required by the Glass-Steagall Act, banks now prefer to engage in self-interested proprietary trading rather than pursuing traditional banking activities that actually promote true “liquidity” across markets. Liquidity in opaque financial instruments may have increased in recent years, but real liquidity, which benefits consumers, investors, small business owners, and homeowners, has not followed suit.

Wow, someone says to the SEC what progressives (including me) have been saying for years: what good are opaque financial instruments like credit default swaps?

Even the technical comments are stated in pungent and direct language. For example, one of the rules excludes repurchase and reverse repurchase agreements from the definition of “trading account,” a central term in the regulation.

The Agencies must remove § _.3(b)(2)(iii)(A) from the Final Rule. The exclusion of repurchase and reverse repurchase agreements (“repos”) from the definition of trading account is a violation of the statute.

I feel really well represented by Occupy the SEC. Here is an impressive pick in which they show the SEC is proposing an overly broad exemption to the rules that is not only inconsistent with the statute but would permit most the activities that caused the financial crash.  Warning: this is seriously wonky.

The Volcker Rule, Dodd-Frank § 619(d)(1)(B), contains an exclusion for certain underwriting activities. Here is the language in the statute:

‘‘(B) The purchase, sale, acquisition, or disposition of securities and other instruments described in subsection (h)(4) in connection with underwriting or market-making related activities, to the extent that any such activities permitted by this subparagraph are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties.

The proposed regs define underwriting using a very broad definition found in Regulation M:

Underwriter means a person who has agreed with an issuer or selling security holder:
(1) To purchase securities for distribution; or
(2) To distribute securities for or on behalf of such issuer or selling security holder; or
(3) To manage or supervise a distribution of securities for or on behalf of such issuer or selling security holder.

Compare that to the statutory definition in the 1933 Act, 15 USC 77b((11)

(11) The term “underwriter” means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission. As used in this paragraph the term “issuer” shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.

There are subtle differences between these two definitions, but it is the context that brings out the important point. The Securities Act requires registration of securities in public offerings. If the securities are registered, the person who distributes them is an underwriter. If the securities are exempt from registration, the person doing the selling is not an underwriter for purposes of the Securities Act. If the SEC chose the statutory definition, only offerings that are registered under the Securities Act would qualify for the exemption from the Volcker Rule. Under Regulation M’s definition, any privately placed security would be exempt. That would be all of the opaque over-the-counter securities that led to the Great Crash. Occupy suggests specific language to close this gaping hole.

Now who do you suppose came up with the idea to use this definition? It would be natural to use statutory definitions on the ground that statutes operate at the same level of generality. Regulations are aimed at specific kinds of problems. I bet the idea originated with lobbyists, not staff.

As I said, nice pick.



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