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March 14, 2012
Occupy Movement Focuses on Volcker Rule
    by Robert Kropp

Financial professionals form the Occupy the SEC movement and submit a 325-page comment letter to the SEC, calling for effective regulation of proprietary trading by banks.

There have been many books published lionizing the few economists and other financial professionals who foretold that high-risk activities on Wall Street posed a threat to global economic stability. None, as far as I know, have commended the work of sustainable investor groups like the Interfaith Center on Corporate Responsibility (ICCR), which as far back as the 1990s introduced shareowner resolutions addressing the manner in which financial institutions collateralized derivatives.

But as Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, said during a panel discussion at last year's SRI in the Rockies conference, "Public policy is a critical tool for making macro-level systemic change. We could spend the next 40 years getting companies to have better carbon footprints and doing less damage to the climate, or we could get a bill that addresses it."

Nowhere is advocacy for change at the macro level more important than in the ongoing implementation of aspects of the Dodd-Frank financial reform legislation passed by Congress in 2010. Investor organizations like US SIF were instrumental in advocating for meaningful legislation, and applauded the inclusion of elements of the Volcker Rule in the bill.

Almost two years later, the Securities and Exchange Commission (SEC) has yet to issue regulations addressing the Volcker Rule, which was intended to require that commercial banks spin off their derivatives trading business. The period for comment letters to the SEC on the Volcker Rule will continue into April.

ICCR has noted that "the occupy movement is clear evidence of a fundamental shift in the public consciousness around corporate power and the need to keep it in check," and an ambitious offshoot of the movement, calling itself Occupy the SEC, has submitted a 325-page letter to the SEC. The letter states, "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," the letter continues. "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." spoke with members of Occupy the SEC about the origins of the movement and its efforts to ensure that economic justice is served by the Commission's eventual regulatory action. According to Akshat Tewary, an attorney, he met Alexis Goldstein "when she was doing a teach-in on derivatives" at one of last year's Occupy activities. "We formed the organization shortly thereafter," he said.

Goldstein is an IT professional who worked for several years on Wall Street.

"The Volcker Rule was meant to be an insurance policy against future bailouts, but the basic idea is that the riskiest part of investment banking is proprietary trading," she told "Proprietary trading can occur through such entities as hedge funds and private equity funds. The idea was that banks can't own hedge funds at all but the final rule that we ended up with is a bit far from that. They're allowed to own up to three percent of hedge funds and there are exceptions that allow them to own 100% of hedge funds."

"We would like the rule to be no proprietary trading at all, but we were trying to work with what we were given," Goldstein continued. "We were trying to make sure that the proposed rule matches the statute as much as possible. There's an important part of the statute that nothing in the Volcker Rule is valid if it poses a threat to the banking entity, if it has a conflict of interest, or if it poses a risk to the stability of the United States. What we were on the lookout for were places in the draft of the rule that were in violation of the statute, or where it was a risk to financial stability or a risk to the bank itself."

An example of the risks associated with weakened regulation can be found in the 2008 collapse of Lehman Brothers, Goldstein pointed out.

"The reason that Lehman Brothers fell as hard and as fast as it did because it, and every other major financial institution, rely on repurchase agreements to do short-term trading," she said. "Having an exemption for that would be a systemic risk."

Furthermore, proposed exemptions in the Volcker rule would continue to allow some banks to create conflicts of interest with their customers, Tewary observed. "We identify high-risk trading activities that the agency should look into, to create outright bans on those kinds of activities," he said.

Not surprisingly, the vast majority of comment letters received by the SEC have come from financial institutions seeking to weaken eventual regulation. The Securities Industry and Financial Markets Association (SIFMA), a financial industry trade association, has submitted five comment letters thus far.

"The proposed regulations are unworkable, not faithful to Congressional intent, and will have negative consequences for US financial markets and the economy," said Tim Ryan, president and CEO of SIFMA.

"The banks are trying to protect their profit margins," Goldstein said. "The Volcker Rule doesn't say you can't prop trade. It just says you can't prop trade if you're a government-backed stock institution and you want to engage in commercial banking. You're completely at liberty to break yourself up, or spin off your investment banking arm. You just can't do it if you want to enjoy the cash cow of commercial deposits, and therefore the backing of the government. This outcry that the banks are doing, saying that this is going to ruin the economy, is really them admitting that they cannot be profitable without the cash cow of consumer deposits, and that they cannot be profitable without the implicit backing of the government."

Occupy the SEC's letter states, "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."

In other words, improved sustainability increases both the stability of the global financial system and the opportunity for long-term outperformance. Addressing the Volcker Rule is yet another example of a natural alignment of the goals of sustainable investors with those of grassroots populism exemplified by the Occupy Movement. There remains a month in which sustainable investors can meet their obligation under the United Nation's Principles for Responsible Investment (PRI) to "support regulatory or policy developments that enable implementation of the Principles."

"We can't do this by ourselves," Goldstein said. "We would love every socially responsible investor to write comment letters on financial regulation to put our voices together. There's still time to weigh in."


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