Senate Negotiators to Offer Plan to Strengthen Volcker Rule

(Bloomberg)

U.S. Senate negotiators will offer changes to the regulatory-overhaul bill that would strengthen language banning proprietary trading at U.S. banks while giving them some leeway to invest in hedge funds and private-equity funds, according to a Senate aide.

The changes target language in the Senate bill that implements the Volcker rule, named after former Federal Reserve Chairman Paul Volcker and proposed by President Barack Obama in January.

The changes to be offered by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat who is leading the negotiations for the Senate, would allow banks to invest 3 percent of their capital in hedge funds and private-equity funds, according to the aide who declined to be identified because the offer hasn’t been released.

The offer Dodd is planning to extend to House negotiators in today’s session will include language based on a proposal from Democratic Senators Jeff Merkley of Oregon and Carl Levin of Michigan to write the ban on proprietary trading into the legislation, the aide said. It would replace language in the Senate bill that would allow regulators to write rules implementing the ban after a study.

Dodd signaled earlier in the talks that he would propose tougher language. “We have a good proprietary trading provision in this bill,” Dodd said this week. “But the idea I think is to strengthen it and I’m all for strengthening it.”

In addition, Dodd will propose adding language based on the Merkley-Levin proposal to curb conflicts of interest by preventing firms that underwrite an asset-backed security from placing bets against them, the aide said.

Goldman Suit

The provision is aimed at addressing the fraudulent activity alleged in the Securities and Exchange Commission’s lawsuit against Goldman Sachs Group Inc. The SEC is alleging the bank created and sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles.

The proposal to allow a small investment in hedge funds and private-equity funds is aimed at retaining support from Massachusetts Senator Scott Brown, one of four Republicans to vote for the Senate bill last month. At least 60 senators will have to approve the bill again before it can be sent to President Obama.

Brown has been pressing for changes in language of the Volcker rule to benefit Boston-based State Street Corp., people familiar with the bank’s argument said. The bank is concerned its asset-management activity would be curtailed, since many of its funds could be considered hedge funds, the people said.

Once Dodd offers the Volcker changes, Senate negotiators can debate the proposal and offer amendments before they approve it and send it to their House counterparts for their consideration.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.