Paul Volcker, former Chairman of the Federal Reserve Board and current Chairman of the President's Economic Recovery Advisory Board, testified on February 2, 2009, before the Senate Banking, Housing, and Urban Affairs Committee. He spoke about President Barack Obama's "Volcker Rule" proposal. The Volcker Rule proposal prohibits a bank or bank holding company from owning, investing in, or sponsoring hedge funds or private equity funds, or engaging in proprietary trading operations for its own profit unrelated to serving customers.
Volcker's speech comes at the same time that the Federal Trade Commission ("FTC") issued a Notice of Proposed Rulemaking ("NPRM"), seeking comment on a proposed Rule that would regulate loan modification, foreclosure rescue, and other mortgage assistance relief ("MARS") providers.
On the issue of international consensus on the Volcker proposal, there were grounds to anticipate success. Volcker felt it would not be difficult to detail the functional definition of hedge funds and private equity funds that commercial banks would be forbidden to own, sponsor or invest in, and proprietary trading in they would be forbidden to engage. Volcker highlighted conflicts of interest in the participation of commercial banking organizations in proprietary or private investment activity, remarking "Hedge funds, private equity funds, and trading activities unrelated to customer needs and continuing banking relationships should stand on their own, without the subsidies implied by public support for depository institutions."
Meanwhile, the proposed FTC Rule, issued on February 4, 2010, would ban MARS providers from collecting fees prior to delivering MARS services, prohibit misrepresentations in the marketing of MARS services, and require affirmative disclosures about the nature and terms of the services. The proposed Rule extends liability for violations to persons or companies who provide assistance or support to MARS providers that violate the proposed Rule.
The Volcker proposals were part of structural reform to deal with the problem of "too big to fail", ensuring that large institutions and their managers and creditors do not assume a public rescue will be forthcoming in times of pressure. But, for Volcker, non-"systemically significant" non-bank institutions, such as hedge funds, private equity funds, and other private institutions, should be allowed to fail in a competitive free enterprise system.
The FTC Rule comes from 2009 Omnibus Appropriations Act, as clarified by the Credit Card Accountability and Disclosure Act, giving the FTC rulemaking authority to prevent unfairness or deception in practices involving loan modification and foreclosure rescue services.
