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
"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."
SocialFunds.com 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
"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 SocialFunds.com. "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.
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
"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."