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tpsbmam

(3,927 posts)
Thu Feb 23, 2012, 05:55 PM Feb 2012

#Occupy the SEC. 325 page comment letter to the SEC, FDIC, Federal Reserve & OCC

Let the detractors read this and claim occupy is unfocused & a silly waste of time.

Occupy the SEC has submitted a 325 page letter to the SEC, FDIC, the Federal Reserve and the OCC, to comment on the notice of proposed rulemaking for the Volcker Rule. In our comment letter, we answered 244 out of 395 questions asked by the Agencies.



This comment letter reflects a level of professionalism I'm willing to bet none of the critics, particularly Republican critics, would ascribe to occupy. And for all those critics who accuse occupy of being unfocused & pointless, maybe this will clue you in.


With that said, here are some excerpts from this awesome Occupy the SEC comment letter:




February 13, 2012

Ben S. Bernanke
Chairman Federal Reserve Board
20th Street and Constitution Avenue, N.W. Washington, D.C. 20551

Martin J. Gruenberg
Acting Chairman
Federal Deposit Insurance Corporation
550 17th Street, N.W. Washington, D.C. 20429

Mary Schapiro
Chairman
Securities Exchange Commission
100 F Street, N.E. Washington, D.C. 20549

John Walsh
Acting Comptroller of the Currency
Office of Comptroller of the Currency
250 E Street, S.W. Washington, D.C. 20219

Re: Prohibitions and Restrictions on Proprietary Trading and Certain Interests in and Relationships With, Hedge Funds and Private Equity Funds (RIN 1557-AD44; RIN 7100 AD 82; RIN 3064-AD85; RIN 3235-AL07)

Dear Sirs and Madam:

Occupy the SEC1 submits this comment letter in response to the above-mentioned regulatory agencies’ (“Agencies”) notice of Proposed Rulemaking (“NPR”, “Proposed Rule”)2 implementing Section 619 of the Dodd-Frank Act (“the Act”).3

Occupy the SEC is a group of concerned citizens, activists, and financial professionals with decades of collective experience working at many of the largest financial firms in the industry. Together, we make up a vast array of specialists, including traders, quantitative analysts, compliance officers, and technology and risk analysts. Like much of the 99%, we have bank deposits and retirement accounts that are in need of protection through vigorous enforcement of the Volcker Rule. Our experiences working inside the financial industry have informed our answers to the questions proposed, making us well-suited to understand and anticipate how the proposed implementation, should it stand, will affect us and the rest of the general public.

The United States aspires to democracy, but no true democracy is attainable when the process is determined by economic power.4 Accordingly, Occupy the SEC is delighted to participate in the public comment process for the implementation of Section 619 of the Dodd-Frank Act by the SEC, Federal Reserve, OCC and FDIC (““the Agencies””). 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. 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. Prohibiting banking entities from engaging in proprietary trading and banning their sponsorship of covered funds are key elements to regulating the financial system and giving force to the Dodd-Frank Act. At its core, the Volcker Rule seeks to make sure that if a banking entity fails, it does not bring down the whole system with it. We appreciate the momentous challenges that the Agencies continue to face in effectively implementing the Rule, and we present these comments to assist them in their task.

This letter contains a summary of our positions. Annexure A hereto contains more detailed answers to 244 of the 395 questions asked by the Agencies. Any questions that remain unanswered in Annexure A should be interpreted by the Agencies as our suggestion that the applicable provision in the Proposed Rule remain unchanged. Annexure B contains a proposed markup of various sections of the Text of the Proposed Rule, and Annexure C contains a proposed markup of the Commentary Regarding Identification of Permitted Market Making–– Related Activities, which appeared as Appendix B to the Proposed Rule.

I. INTRODUCTORY COMMENTS
Proprietary trading by large-scale banks was a principal cause of the recent financial crisis,5 and, if left unchecked, it has the potential to cause even worse crises in the future. In the words of a banking insider, Michael Madden, a former Lehman Brothers 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.6


The interconnectedness of banks under the shadow banking system had the effect of magnifying one bank’’s proprietary trading losses (e.g., Lehman Brothers) and transferring them across the market as a whole. Lobbyists’’ exhortations notwithstanding, proprietary trading by government- backstopped banks is a fundamentally speculative and risky phenomenon that must be circumscribed.

During the legislative process, the Volcker Rule was woefully enfeebled by the addition of numerous loopholes and exceptions. The banking lobby exerted inordinate influence on Congress and succeeded in diluting the statute, despite the catastrophic failures that bank policies have produced and continue to produce.7 Nevertheless, the Volcker Rule, in its current statutory form still has the potential to rein in certain speculative trading practices by banking entities that enjoy ready access to customer deposits and virtually limitless funding through various Federal Reserve programs. We encourage the Agencies to stand strong against the flood of deregulatory pressure that they have and will continue to face in connection with their implementation of the Volcker Rule. A vigorously implemented and enforced Volcker Rule would serve as insurance against the need for future bank bailouts funded by taxpayers.8 The Agencies must take advantage of this historic opportunity to protect the financial position of the average person living in the United States.

A. The Agencies’’ Lax Regulatory Posture


The Agencies have been universally lambasted, by banks, by advocacy groups, by Congress, and by the media, for promulgating a Proposed Rule that is a 500-page web of complexity.9 Even former Federal Reserve Chairman Paul Volcker, the Rule’’s namesake, has criticized the Proposed Rule for its length.10 To some extent, the Proposed Rule’’s length is to be expected because the statute it implements, Section 619 of the Dodd-Frank Act, is itself replete with loopholes, exemptions and limitations. Even so, in issuing implementing regulations, the Agencies have avoided simple, bright-line rules that could have clearly delineated exactly what is and is not permissible under the statute. As discussed below, the Agencies have sadly eschewed clarity, instead muddying the regulatory waters with multi-factor tests, a vague intentionality requirement, newly created loopholes and exemptions, and definitional uncertainty. The absence of bright-line rules was not a happenstance or an unintended consequence; it was a conscious choice that evinces a lax regulatory posture among the Agencies. Federal Reserve Governor Daniel Tarullo recently testified before the Congressional Financial Services Committee that the Proposed Rule was designed to avoid ““definitive bright lines”” in favor of a ““more nuanced framework.””11 We advise the Federal Reserve and the other Agencies not to confuse mere complexity for nuance. Simple bright-line rules make the compliance process easier, both for the regulated and for the regulator.

Another troubling element within the Proposed Rule is the Agencies’’ ultra vires interposition of an intentionality requirement into various aspects of the Proposed Rule, despite the complete absence of any explicit intentionality safe harbor in Section 619. Securities and Exchange Commission Chairman Mary Schapiro told the Financial Services Committee that ““[w]e have no interest in pursuing activity where people are intending to provide market-making and get it wrong.””12 The banking lobby was undoubtedly heartened by this frank admission of regulatory forbearance. Even so, the Securities and Exchange Commission (““SEC””) and the other Agencies are reminded that Section 619 requires strict compliance and imposes strict liability. Nowhere does the statute forgive ““well-intentioned”” breaches of the law.

The Proposed Rule also evinces a remarkable solicitude for the interests of banking corporations over those of investors, consumers, taxpayers and other human beings. In their Overview of the Proposed Rule, ““the Agencies request comment on the potential impacts the proposed approach may have on banking entities and the businesses in which they engage,””13 but curiously fail to solicit comment on the potential impact on consumers, depositors, or taxpayers. The Administrative Procedure Act requires that, prior to the enactment of a substantive regulation, an agency must give ““interested persons”” an opportunity to comment.14 The Agencies seem to have lost sight of the fact that ““interested persons”” could include human beings, and not just banking corporations.

We are not flippantly criticizing the Agencies for having a lax regulatory posture in their implementation of Section 619. We are basing our concerns on the regulators’’ own words, as noted above, and as discussed in detail below.

B. The Absence of Penalties in the Proposed Rule

The Agencies have inherent authority to impose automatic penalties and fines for certain proscribed activities, and Section 619 does not impinge on that authority:

Nothing in this paragraph shall be construed to limit the inherent authority of any Federal agency or State regulatory authority to further restrict any investments or activities under otherwise applicable provisions of law.15


Nevertheless, the Proposed Rule fails to define any automatic penalties or fines for violations of the restriction on proprietary trading. We are cognizant of the fact that Section 8 of the Bank Holding Company Act already contains a general framework for criminal and civil penalties. Nevertheless, the Agencies have the ability to define particular penalties for specific violations of the Volcker Rule, and they should consider doing so while drafting the Final Rule.

C. The Need for a Strong 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. The inflation-adjusted Dow Jones Industrial Average is around the same level that it was in the mid-to-late 1990’’s.16 Similarly, the income of the typical American family is at the same level that it was in 1996.17 However, unlike in 1996, over 28% of American homes are ““underwater.””18 The banking lobby’’s elixir, financial market liquidity, has done little to reverse this trend. We therefore urge the Agencies to take banks’’ animadversions regarding ““liquidity”” with a grain of salt.

Certain commentators have opined that the Volcker Rule puts American banks at a global disadvantage. However, stable, customer-focused banks actually enjoy a competitive advantage as they are freed from the shackles of risk attendant to proprietary trading activities. This competitive advantage will create a first-mover advantage for American banks that pursue less risky, more productive activities. Foreign banks that continue to conduct proprietary trading will fail at higher rates, thereby undermining their competitiveness.

Much of the criticism levied upon the Agencies by Canadian, Japanese, and European banks and regulators has been unwarranted. As the Agencies are aware, the Volcker Rule does not prohibit proprietary trading activities outright. Rather, the Rule only restricts banks that have an implicit government insurance policy from engaging in such activities. The ““invisible hand of the free market,”” that darling cherub of neoliberal economics, will likely push much of the current proprietary trading into the folds of hedge funds or traditional investment banks, not eliminate them outright (assuming, of course, that such activities actually add productive value to the economy). The Volcker Rule simply removes the government’’s all-too-visible hand from underneath the pampered haunches of banking conglomerates.



Then it goes on to definitional issues followed by categories it discusses. Here’s a section on proprietary trading, which is just an example of the thoroughness & professionalism found throughout the letter.



III. PROPRIETARY TRADING

A. Underwriting

We suspect that the vast majority of comment letters on the proposed implementation of the Volcker Rule will criticize the Agencies for promulgating unduly complicated rules. The proposed implementation of the underwriting exemption is a prime example of the Agencies injecting needless complexity into a simple statutory mandate.

1. The Underwriting Exemption Should be Limited to Registered Securities

The Agencies have transgressed their delegated authority by allowing the underwriting exemption in the Volcker Rule to include private placements. Section 619(d)(1)(B) permits certain ““underwriting . . . activities.”” Not coincidentally, this section is bereft of any mention of ““private placement activities”” or ““placement agent.”” In issuing implementing regulations, an administrative agency must give effect to the unambiguously expressed intent of Congress.37 Under the basic securities law definition of the term, an ““underwriter”” includes ““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.””38 Such a person is required to file a registration statement before offering to sell a security as part of a primary distribution.39 Conversely, if a person is legally exempt from the registration statement requirement, that person cannot be an ““underwriter”” under Section 2(a)(11) of the Securities Act of 1933 (““’’33 Act””). For example, a placement agent relying on the Rule 144 exemption is not considered an ““underwriter.””40 Thus, the Section 2(a)(11) definition of underwriter would require that any underwriting activities permitted under the Volcker Rule be in connection with regulated securities.

Much to our chagrin, the Agencies have found a way to bypass this basic stricture. In defining the term ““underwriter”” in the Proposed Rule, the Agencies curiously rely on the definition of that term in Regulation M, instead of the more obvious and basic definition found at Section 2(a)(11) of the ’’33 Act.41 Section 2(a)(11) has close to a century of case law and interpretive guidance supporting it, and is therefore more appropriate than the Regulation M definition. Further, as noted above, nothing in Section 619 or the Congressional Record suggests that Congress wanted ““underwriter”” to be defined as per Regulation M. Moreover, Regulation M is not a good definitional source because the underlying purpose behind it conflicts with the underlying purpose behind the Volcker Rule. Regulation M was designed to prevent manipulation and other activities that could artificially influence the market for an offered security.42 Thus, a broad interpretation of the term ““underwriter”” was naturally necessary in that context to promote greater investor protection and market stability. However, using the same broad interpretation of ““underwriter”” in the context of Section 619 would actually undermine investor protection, as it would increase the size of the underwriting loophole through which covered banking entities could conduct risky proprietary trading activities.

The underwriting exemption should also explicitly exclude private placement for a very practical reason: allowing underwriting in private placements would be tantamount to allowing any and all proprietary trading in opaque over-the-counter (““OTC””) instruments. OTC markets are generally very illiquid, with few parties willing to buy or sell a particular offering. The Agencies’’ current interpretation of ““customer”” is extremely expansive, and includes virtually all counterparties, whether pre-existing customers or not. Thus, any banking entity that purchases a position in an OTC instrument from any counterparty could call itself an ““underwriter,”” under the guise that it intends to later distribute the instrument to other ““customers.”” Even if the banking entity intends to purchase an OTC instrument for purely speculative purposes, it can justify holding that instrument in its inventory under the rationale that no buyers are available because the market is illiquid. This result would render moot the Volcker Rule’’s restrictions on the riskiest proprietary positions. Instead of conducting safe, traditional, customer-focused underwriting, banking entities would be enabled to continue with their ““Originate and Distribute”” model, whereby esoteric securities are fashioned from thin air, and ““underwritten”” solely for fee generation purposes and not to promote liquidity in non-financial markets.
In light of the above, we recommend the following changes to the Proposed Rule:

§ _.4(a)(2)(ii): The covered financial position is a registered security;

§ _.4(a)(3): Definition of distribution. For purposes of paragraph (a) of this section, a distribution of securities means an offering of securities, whether or not subject to registration under the Securities Act, that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods.

§ _.4(a)(4): Definition of underwriter. For purposes of paragraph (a) of this section, underwriter means:
(i) A person who has agreed with an issuer of securities or selling security holder:
(A) To purchase registered securities for distribution;
(B) To engage in a distribution of registered securities for or on behalf of such issuer or selling security holder; or (C) To manage a distribution of registered securities for or on behalf of such issuer or selling security holder; and
(ii) A person who has an agreement with another person described in paragraph (a)(4)(i) of this section to engage in a distribution of such registered securities for or on behalf of the issuer or selling security holder.




37 Chevron U.S.A. Ins. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). 38 15 U.S.C. § 80b-2(a)(11). 39 15 U.S.C. §§ 80b-4(1), 5(c). 40 Preliminary Note to Rule 144, 17 C.F.R. § 230.144 (2012).
41 Compare 17 C.F.R. § 242.100 (2011) (Regulation M definition) (““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.””), with 15 U.S.C.. § 77b(11) (2011) (Section 2(a)(11) definition of underwriter) (““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.””).
42 FINRA, Regulation M Filings, http://www.finra.org/Industry/Compliance/RegulatoryFilings/RegulationM/ (last visited Jan. 5, 2012).
43 Jim Naughton, The Economic Consequences of IPO Spinning, Harvard Law School Corp. Gov. Forum, Sep. 30, 2009, http://blogs.law.harvard.edu/corpgov/2009/09/30/the-economic-consequences-of-ipo-spinning/.





This letter is a thing of beauty and an incredibly powerful document speaking out for the 99%. It's a must read IMO.



Links:

Occupy the SEC comment letter (PDF)

Occupy the SEC website

Twitter: @OccupyTheSEC

Volcker Rule HTML

Volcker Rule PDF

Volcker Rule Wikipedia


A few notes about these excerpts. 1) Much of the formatting in the original document has been lost and I haven't taken the time to put it back in. What's most important here is the content -- the formatting of the content is less so. 2) emphases in italics are mine; emphases in bold and the strikethrough are in the original 3) This is in the form of a letter. As such, I've taken liberties in terms of how much of the letter I posted. It's my understanding that letters don't have the same copyright restrictions as published materials. If I'm wrong, I'll be happy to rework the post to comply with tighter restrictions.



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