WASHINGTON, Feb 13 (Reuters) - Wall Street and business lobbying groups are sending a not-so-subtle message to U.S. financial regulators writing the so-called Volcker rule: Slow down or we may see you in court.
In letters filed with regulators on Monday, the groups said they do not believe the agencies have taken the time or made the effort to weigh the costs of the new ban on proprietary trading by banks on the economy or the business community.
The trading crackdown, whose guidelines are being written by regulators, is named after former Federal Reserve Chairman Paul Volcker, who championed the idea.
The groups' letters are filled with reminders that the courts have already shot down one rule required by the 2010 Dodd-Frank financial oversight law for this reason.
"If it comes to this being litigated, it is one of the issues for the courts," said David Hirschmann, president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, who filed a letter with the Federal Reserve, the Securities and Exchange Commission and other regulators writing the rule.
The groups also argued that the rule's July effective date is coming up soon. They asked the regulators to allow the ban to be phased in gradually rather than having it apply to all trading markets right away.
U.S. industry groups, foreign banks and individuals flooded the government with dozens of letters on Monday - the deadline for the public to weigh in on the controversial proposal released in October.
The Volcker rule was part of Dodd-Frank, and it prohibits banks, which receive federal backstops like deposit insurance or access to Fed loans, from trading for their own profit.
For months, banks and foreign governments have painted a doomsday scenario in which Wall Street can no longer serve basic client needs, market liquidity dries up, and trading in sovereign debt stutters.
The letters do not explicitly threaten a lawsuit, and officials with the trade groups said their goal is to get the agencies to write a rule that best serves the markets.
"That's the real concern," said Rob Toomey, a managing director and associate general counsel with the Securities Industry and Financial Markets Association (SIFMA). "We think there is just too much here that needs to be changed and needs to be changed in some fundamental ways."
SIFMA filed a 173-page letter along with the American Bankers Association, the Clearing House Association and the Financial Services Roundtable while the chamber filed its own 46-page comment.
The letters make a point to detail the different laws and executive orders requiring an economic impact of a regulation that the groups believe regulators have not adequately followed.
They also highlight the July 2011 decision by the U.S. Court of Appeals for the District of Columbia Circuit to reject an SEC rule intended to make it easier for shareholders to nominate directors to corporate boards - so-called "proxy access".
The court ruled the SEC rule was "arbitrary and capricious" and that the agency had failed to properly weigh the economic consequences. The suit was filed by the chamber and the Business Roundtable.
Banking lawyers said that a case against proprietary trading ban could be more difficult to litigate than the proxy access case. The reason is that the banking regulators, who are writing the rule along with the SEC, do not face the same legal requirements with regard to cost-benefit analyses.
"An SEC rule does require a greater analysis of costs and benefits than the bank regulators are required to adhere to," said Dwight Smith, a partner at Morrison & Foerster in Washington.
When Volcker pitched the proprietary trading ban to President Barack Obama, the letter was reportedly three pages long.
But when regulators dropped their proposal in October, it was roughly 300 pages and included hundreds of questions for public comment, including on how the government should write an exemption for trades that banks make for their customers' benefit, known as "market making."
The financial community griped that it was too complex and too vague, and some industry groups have said it should be re-proposed. SIFMA and the other lobbying groups asked regulators to scrap a plan that sets "bright lines" for what trades are allowed.
Instead they are pushing for a system where regulators issue guidance on what is allowable and then let agency examiners work with the individual banks on whether what they are doing is allowed under the law.
In his own letter to regulators on Monday, Volcker downplayed banks' concerns about how the rule could hurt liquidity, and make U.S. banks less competitive against foreign competitors who do not face similar restrictions from their own regulators.
He emphasized his position that banks that enjoy the support of federal backstops should not be taking the risks associated with proprietary trading.
Volcker urges the agencies and bankers involved in the debate to avoid bickering and get the rule done.
"With active cooperation among the agencies and with constructive consultation instead of futile stonewalling, an important reform can soon be put in place," he wrote.
(Reporting by Dave Clarke and Alexandra Alper; Additional reporting by Jed Horowitz)
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