The top U.S. securities regulator said on Tuesday her agency is exploring whether insurance companies can qualify for a coveted exemption in the proposed Volcker rule that would protect them from having to scale back their investments in hedge funds.
“This is a really important issue, we understand that, and we are reviewing the comment letters carefully,” Securities and Exchange Commission Chairman Mary Schapiro told lawmakers at a hearing on Tuesday.
“We are looking at whether there could be flexibility on this point. We do have exemptive authority under the Volcker rule, but the standard is high.”
The Volcker rule, which has become one of the most controversial parts of the 2010 Dodd-Frank financial oversight law, seeks to add distance between the world of speculative trading and commercial banking.
The proposal bans banks from proprietary trading, or trades that are made solely for their own profit, and limits their investments in hedge funds.
It would mostly affect large banks, such as Goldman Sachs and Morgan Stanley
Some insurance companies, such as Nationwide Mutual Insurance Co., have complained they would be hit by the Volcker rule because they are affiliated with a bank.
Congress had attempted to avoid this scenario by exempting their insurance operations from the restrictions that banks will face.
But in October, U.S. banking regulators and the SEC unveiled a plan that caught insurance companies off guard by only extending the exemption to cover their proprietary trading activities, and not their private fund investments.
Insurance companies were further spooked in January when, during a House Financial Services Committee hearing, Schapiro told lawmakers she believed the law only exempted the proprietary trading activities of insurance companies.
After that hearing, a lobbying effort kicked into full gear and regulators were flooded with letters pushing for the fund investing exemption to be written into the final rule.
Lawmakers and industry officials have contended that Schapiro is misreading the law and that the intent of Congress has always been to exempt insurance companies from the fund investing restrictions as well as the proprietary trading crackdown.
“We believe it is imperative that, as the agencies move forward, they follow Congressional intent and permit insurance companies to continue investing in covered funds for their general accounts,” a bipartisan group of 17 lawmakers wrote to Schapiro and other regulators on Jan. 27.
Insurance companies argue that putting their operations under the under the Volcker rule would greatly inhibit their ability to conduct business and that the type of trading and fund investing they do has little in common with the risky trading the rules seeks to curb.
When asked about the issue on Tuesday during a hearing to review the agency’s 2013 budget request, Schapiro said regulators followed the law closely when drafting the October proposal and deciding what insurance activities to exempt. Now, she said, the agency is reviewing comment letters and trying to decide how to proceed.
While she was aware of the concerns, she warned that a high bar has been set for the exemption because under the law regulators would have to determine the reprieve would “promote the stability of the US financial system and the safety and soundness of the banking system.”
She added that the SEC is “looking very carefully” at the possibility of granting an exemption to insurance companies.
(Reporting By Sarah N. Lynch and Dave Clarke; Editing by Tim Dobbyn)