Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation, Part II

Oral Statement of Paul Schott Stevens
President and CEO
Investment Company Institute

Committee on Financial Services
U.S. House of Representatives

December 13, 2012
Washington, DC

As prepared for delivery.

Thank you, Chairman Bachus. This will be my last opportunity to appear before the Committee in this Congress, so let me take a moment to salute you and former Chairman Barney Frank for your leadership during a period of extraordinary challenges. America’s investors owe you both a great debt of gratitude.

I appear today on behalf of the Investment Company Institute, the national association of mutual funds, exchange traded funds, closed end funds, and other registered investment companies, and the 90 million American investors whom our members serve.

Mr. Chairman, by rights, our industry should have few, if any, concerns about the Volcker Rule. Congress enacted Section 619 of the Dodd-Frank Act to restrict banks from engaging in proprietary trading and from sponsoring or investing in hedge funds or private equity funds.

The Volcker Rule was not directed at the Institute’s members—that is, registered investment companies.

And yet—unfortunately—the ways in which the five regulatory agencies propose to implement the Volcker Rule would expand the reach of Section 619 far beyond what Congress intended. This raises a number of serious concerns for registered funds.

Chief among our concerns is the fact that the proposed implementing rule could treat many registered funds as hedge funds—a result that contradicts the plain language Congress passed.

The statute restricts banks’ relationships with hedge funds, private equity funds, and “similar funds” as defined by the regulators. The statute defines hedge funds and private equity funds by reference to the fact that these investment vehicles are not regulated under the Investment Company Act of 1940. Clearly, registered funds, which are organized and operated under that Act’s strict requirements, are not remotely “similar” to the funds Congress intended to cover in the Volcker Rule.

Yet the definition of “covered funds” offered by the agencies would sweep many registered funds under the Volcker Rule. The same definition would also sweep in all non-U.S. retail funds—even though these non-U.S. retail funds are comprehensively regulated in their home jurisdictions and therefore are not the type of funds Congress meant to reach.

In addition, some U.S. registered funds and non-U.S. retail funds could be treated as “banking entities,” which would subject them to all of the prohibitions and restrictions in the Volcker Rule.

Implementing the Volcker Rule in this way will impede the organization, sponsorship, and normal activities of U.S. registered funds and of non-U.S. retail funds alike. Investors will suffer as a result.

In detailed written submissions and numerous meetings, ICI and its international affiliate, ICI Global, have urged the agencies to provide explicit exclusions from the Volcker Rule for U.S. registered funds and non-U.S. retail funds, as well as clarification that these funds are not “banking entities.”

Registered funds also must look at the Volcker Rule and its implementation from our perspective as investors in the capital markets. We do not believe that the proprietary trading restrictions, as currently proposed, will achieve their intended goal of addressing risky and speculative trading by banks. Instead, they are likely to have broader adverse impacts on the financial markets in the U.S. and abroad, and in the process will penalize registered funds and other investors who participate in those markets.

The proposed trading restrictions could decrease liquidity, especially for those markets that rely most on banking entities to act as market makers, such as the fixed income and derivatives markets and the less liquid portions of the equities markets. A reduction of liquidity could ultimately lead to higher costs for fund shareholders and other investors.

Similarly, the proprietary trading provisions call into question whether banking entities could continue to serve as Authorized Participants and market makers for exchange-traded funds (ETFs). Banks play a critical role in ETF trading to help maintain efficient pricing and protect ETF investors. We recommend clarifying the Proposed Rule to spell out that banking entities can continue to support the efficient functioning of the ETF market.

In this and our other areas of concern, we believe that the agencies implementing the Volcker Rule have it within their power to avoid all of these harmful consequences for funds and their investors. Given the number and seriousness of the issues that need to be addressed, however, we have recommended, and continue to urge, that the agencies issue a revised proposal for public comment before adopting any final rules.

Further, we are deeply concerned about recent press reports that raise the possibility that the agencies will adopt final Volcker Rule regulations that substantially differ one from the other. This would be a disaster—and it would fly in the face of Congress’s express direction that the agencies coordinate their rulemaking. We urge the Committee to do all it can to ensure the consistency of any final rules issued by the agencies.

Finally, if the serious adverse consequences for registered funds are not addressed through the regulatory process, ICI has suggested potential legislative changes to address several of our concerns. We stand ready to work with the Committee and interested Members in this regard.

Mr. Chairman, thank you again for the opportunity to present our views, and I would welcome your questions.