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Senate Dems eye easing Volcker rule's fund limits

Date: Thursday, June 24, 2010
Author: Bloomberg

The Senate was moving on Wednesday to water down the controversial "Volcker rule" on bank trading and investing as lawmakers raced to complete landmark Wall Street reform legislation within days.

In a potential victory for bank lobbyists, banks would be allowed to invest up to 2 percent of total Tier 1 capital in hedge funds and private equity funds, under a version of the Volcker rule outlined in a document obtained by Reuters.

More specifically, the document proposes a 3-percent Tier 1 capital cap on bank interests in hedge fund "seed capital," and a cap on banks' stakes in private equity funds that could not exceed 5 percent of an individual fund's total capital.

Banks would have five years after the law takes effect to sell off stakes in funds that exceed the proposed caps, according to the document.

Democratic Senator Christopher Dodd, head of the Senate negotiating team on a panel writing the Wall Street reform bill, said the Volcker rule debate was not over yet.

"We don't have language yet on the Volcker rule, we are working on it," he said, adding Senate staffers would work into the night on the proposal to be unveiled on Thursday.

The original Volcker rule called for barring any sponsorship of or investment in private equity and hedge funds by banks, while also curbing proprietary trading that banks do for their own accounts unrelated to the needs of customers.

Billions of dollars in profits for some of Wall Street's biggest financial institutions are at stake.


Senator Scott Brown -- who has clout on Wall Street reform as a key Republican swing vote -- was increasingly at the center of efforts to weaken the rule, Senate aides said.

He is one of a handful of Republicans seen as likely to vote with Democrats to overcome procedural hurdles in the Senate and win passage of the final overall bill. Then it could be sent to President Barack Obama to sign into law.

Lobbyists for Bank of New York Mellon, State Street Corp and Northern Trust Co have been especially active in pressing for exemptions to let their asset management units continue to make small, or 'de minimis,' investments in private equity and hedge funds, aides said.

More recently, the aides said, proposals for changes to the rule seem to reflect the business needs of Wall Street giants such as Goldman Sachs and JPMorgan Chase, both big players in recent years in the private equity business.

The rule is named after White House economic adviser Paul Volcker, who proposed it in January along with President Barack Obama, stunning banks deeply involved in proprietary trading, private equity and hedge funds.

The Senate included a version of the rule in landmark Wall Street reform legislation it passed last month. Critics said that version left the door open to watering down of the rule by regulators in the implementation phase.

Democratic senator Jeff Merkley and Carl Levin have rewritten the rule to reduce regulators' latitude on writing the rule's details. The Merkley-Levin language will be used in the final bill, Dodd said on Tuesday.

A joint Senate-House of Representatives panel is now working to combine the Senate bill with one approved in December by the House, which excluded the Volcker rule.

Tier 1 capital is a key measure of a bank's strength.