Lack Of SEC Resources Could Be Biggest Hurdle For Volcker Rule

This week the Financial Stability Oversight Council put out a study and recommendations on the Volcker Rule, providing a road map toward the rules that will come out within a few months.

According to the New York Times, the hurdle they face is simple: there is no easy way to tell a proprietary trade from another kind of trade, particularly given the exemptions worked into the law.

Yet in the end, the Volcker Rule may work, even if there are ways around it, says Times columnist Floyd Norris, who interviewed 83-year-old Paul Volcker.

"I may not understand modern financial attitudes," Volcker said, "but I don't think a bank wants to be conducting financial activities that will be revealed as simply skirting the law."

Still, a lack of resources for the SEC and other watchdogs will potentially be the biggest hurdle regulators face.

As stated in the New York Times:

[It] is worth noting that regulators are being asked to do a lot without a commensurate increase in resources. That may not hurt the Fed, which sets its own budget, but the Securities and Exchange Commission is getting stretched very thin and the new Republican House leadership shows no interest in fixing that.

The S.E.C. this week put out a report on inspections of financial advisers, as required by Dodd-Frank. The staff concluded that the commission would not have the resources to do enough inspections, and asked Congress to either allow it to impose fees on advisers to pay for the inspections or assign the task to self-regulatory organizations, which could impose similar fees.

One commissioner, Elisse Walter, voted to release the study but argued that it did not go far enough. "We need to address this issue now," she concluded. "For far too long, in the investment advisory area, the commission has been unable to perform its responsibilities adequately to fulfill its mission as the investor's advocate, and investment advisory clients have not been adequately protected. This must change."

Regulatory priorities come and go. For now the Volcker Rule seems important, but then we are only a couple of years removed from the Madoff scandal. Yet it seems unlikely Congress will provide the needed resources to assure there are adequate inspections of money managers.

It may not be that many years before some banker concludes the possible profits from speculative trading are attractive enough to justify trying to get around a rule whose enforcement no longer seems to be a priority.