House Lawmakers Submit Letter to SEC Stating That Volcker Rule Lacks Required Economic Analysis (with Lofchie Comment)

House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Representative Scott Garrett (R-NJ) wrote a letter to SEC Chair Mary Jo White asking for an explanation for the failure of the SEC to conduct an economic analysis in promulgating the final Volcker Rule.

According to the letter, the SEC is required to conduct a detailed analysis of the likely economic consequences of its rules, and "to connect these consequences to efficiency, competition, and capital formation." The letter stated that the Administrative Procedures Act ("APA"), Federal securities laws and subsection 106(f) of the National Securities Markets Improvement Act require the SEC to conduct economic analysis of its actions. Additionally, the letter cited a recent judicial ruling which confirmed that the agency has a "statutory obligation" to assess the impact of its rules, and that failure to do so "makes promulgation of the rule arbitrary and capricious and not in accordance with law."

The letter stated that the rule has significant impact on the U.S. capital markets and the broader economy. The Representatives requested a response from the SEC by January 24, 2014, detailing the legal justification for not conducting an economic analysis to accompany the final Volcker Rule.

Lofchie Comment: The fundamental problem is not the implementing regulations; it is the statute. The SEC is under the clearest statutory burden to conduct a cost-benefit analysis, but the letter could have been sent to the banking regulators and the CFTC as well. It has become generally accepted among media elites that the Volcker Rule will prevent banks from engaging in the riskiest types of investments. Butthe GAO's study of "Proprietary Trading" (July, 2011 at p. 14) found that the aggregate trading losses at the six largest banks following the financial crisis was $221 million; overall, the activity has been profitable for these banks. Given that the Volcker Rule is likely to hurt banking entities in the long run, the SEC (and the other financial regulators) are in a tough position to respond to this letter.

See: Rep.Hensarling and Rep. Garrett's Letter to SEC.See generally: Cabinet Volcker Materials (accessible to Cabinet subscribers only).Related news:Trade Associations Request Further Clarification Regarding Ownership Interests for Debt Securities under New Volcker Rule Regulations (January 7, 2014); Agencies Are Reviewing Treatment of Specified Collateralized Debt Obligations under Volcker Rule (December 27, 2013); Trade Associations Request Clarifications Regarding Holding Debt Securities Under New Volcker Rule Regulations (with Lofchie Comment) (December 26, 2013); Cadwalader C&F Memo: "The Volcker Rule's Impact on Banking Entities' Ownership and Sponsorship of Structured Finance and Securitization Transactions" (December 16, 2013); Agencies Issue Final Volcker Rule (with Cadwalader Partner Scott Cammarn Interview on Bloomberg TV) (December 10, 2013).