PPAI 2000 - Institutions and Policymaking, Memo #2 To: Elizabeth M.

Murphy, Secretary, Securities and Exchange Commission From: Kelsey Sherman Date: October 18, 2012 Subject: Dodd-Frank Wall Street Reform and Consumer Protection Act Executive Summary: This memorandum addresses the Volcker Rule made effective as part of the Dodd-Frank Act on July 21, 2010. This memo is intended to inform you of the rule that may not survive in the prospective Romney administration. The memo (1) summarizes what the Volcker Rule does, (2) the three issues that appear most controversial, (3) the advantage and disadvantages of revisiting the rule, (4) recommendation that you should not revisit and revise the rule, 1. The Rule and What it Does The Dodd-Frank Act was passed as a response to the recession in the late 2000s. The Act brought significant changes in financial regulation. The Volcker Rule, part of DoddFrank, aims to restrict these banks from trading for their own benefit. It prohibits a financial institution thats insured by the Federal Reserve from1: a. Engaging in proprietary trading b. Acquiring or retaining any equity, partnership, or other ownership interest in a hedge fund or private hedge fund c. Sponsoring a hedge fund or private equity fund (2012). Federal reserve system: 12 cfr part 225. Federal register. , 77(111), 3394933950. Retrieved from http://www.stlouisfed.org/regreformrules/Pdfs/2012-61

The rule would allow firms to buy and sell stocks, bonds and derivatives on their own. This would have to occur in areas where regulators believe healthy markets would not exist without Wall Streets own trading. This includes the markets for government bonds, commodities and foreign currencies. 2. The Issues that Appear Most Controversial The idea behind the Volcker Rule was self-explanatory at the time of the economic downturn. It was simple. However, finding a balance between effectively removing risk and threatening the economys health has proven to be a large challenge. The rule is not simple. There are three controversial issues associated with the Volcker Rule. The Committee of Financial Services addressed each of the issues.2 As the Committee sees it, the Volcker Rule does three things: 1. Threatens the health of the financial industry. It in turn threatens the broader economy. The Rule undermines the United States ability to compete economically. Foreign governments and corporations have echoed this fear. 2. Makes it harder to obtain small businesses loans. This will make it harder to gain capital and create jobs. Foreign governments and corporations have echoed this fear. 3. Doesnt distinguish between positions for proprietary trading and market making. Market-making is exempt under Dodd-Frank. There is no uniform definition of market-making. Emerson, J., & Garibay, M. (2012, August 07).Chairman bachus seeks publics input on volcker rule alternative. Retrieved from http://financialservices.house.gov/news/email/show.aspx? ID=QQ6RHEUNXVONNEIRYOVEOQ2XVI
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3. Advantages and Disadvantages of Revisiting the Rule There is one advantage and two major disadvantages to revisiting the Volcker Rule. Advantage: 1. Changing the implementation period. Revisiting the rule could delay the two-year implementation period of the rule. Delayed rules affect regulated entities because the longer the delay in the issuance, the longer the period of relief from compliance costs for the effected sector or industry.3 If you could change or delay the implementation period, then the rule could possibly outlast the prospective Romney Administration. If the rule were to not make any changes during Romneys time, there would be less chance that the Romney Administration would pay attention to the rule. Disadvantages 1. Rewriting and clarifying the following points of issue. 1. Set one uniform definition of market-making. This definition could be explained within the context of the rule to avoid conflict. 2. Create incentives to encourage international trade and international competition. Doing so could potentially negate the claims that the rule would ruin the American economy. However, these incentives would probably have to be too expansive to be successful in this context. 3. Create a provision to exclude small businesses loans from the Volcker Rule. Such provision could be completely ineffective. It could potentially set a precedence for the creation of more loopholes within the rule. Kerwin, C. (2010). Rulemaking: How government agencies write law and make policy. (4th ed., p. 214-227). Washington DC: CQ Press.
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These amendments would theoretically enhance the rule. However, since Romney is against everything related to the rule, there is little chance that rewriting and adding provisions would help the rules chances of surviving. 2. Bringing unwelcome attention to the rule. If the rule is revisited, it will be thrusted back into the spotlight. If revisited, the factors that are likely to have major effects could generate public attention and generate further opposition. If it is left alone, there is a very slim chance that the rule could be overlooked. Oversight could be key in the survival of the rule. This is the most critical point when assessing whether or not the rule should be revisited. 4. Do Not Revisit and Redraft the Rule It would be a complete waste of your time to revisit this bill. Though each of the aforementioned strategies could potentially be beneficial, they would not be enough to combat a complete overturn of the Act. A cornerstone of the Romney campaign is the elimination of undue economic burdens. This alone provides enough reason not to revisit the Volcker Rule If elected, The Romney Administration will absolutely try to overturn the Volcker rule and repeal the entire Dodd-Frank Act. Mitt Romney says that one of the greatest problems with the federal bureaucracy is that each administration does not change its predecessors regulations. He argues that this creates a layer of unnecessary regulation. He believes regulations function as a hidden tax on Americans. 4

Mitt romney for president. . (n.d.). Retrieved from http://www.mittromney.com/collection/smaller-smarter-simpler-government

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References Bill summary and status. (2009, April 21). Retrieved from http://thomas.loc.gov/cgibin/bdquery/z?d111:HR01388:@@@D&summ2=m&

Emerson, J., & Garibay, M. (2012, August 07).Chairman bachus seeks publics input on volcker rule alternative. Retrieved from http://financialservices.house.gov/news/email/show.aspx? ID=QQ6RHEUNXVONNEIRYOVEOQ2XVI (2012). Federal reserve system: 12 cfr part 225. Federal register. , 77(111), 3394933950. Retrieved from http://www.stlouisfed.org/regreformrules/Pdfs/2012-6Kerwin, C. (2010). Rulemaking: How government agencies write law and make policy. (4th ed., p. 214-227). Washington DC: CQ Press. McCubbins, M. and Schwartz, T. (Feb., 1984). Congressional oversight overlooked: Police patrols vs. fire alarms. (Vol. 28, No. 1 pp. 165-179). American Journal of Political Science , Mitt romney for president. . (n.d.). Retrieved from http://www.mittromney.com/collection/smaller-smarter-simpler-government Volcker rule. (2012, May 10). The new york times.. Retrieved from http://topics.nytimes.com/top/reference/timestopics/subjects/v/volcker_rule/index.html