By Alexandra Alper
WASHINGTON (Reuters) - The controversial ban on banks' proprietary trading known as the Volcker rule has big vulnerabilities and should be reproposed, or face possible legal challenges, a prominent Washington attorney said on Tuesday.
Eugene Scalia, a partner at Gibson, Dunn & Crutcher who last year helped business groups win a court ruling striking down a major rule on board nominations, told an audience at the U.S. Chamber of Commerce that regulators have an obligation to carefully assess the Volcker rule's economic effects.
"When you read the Volcker proposal document put forth, there are gigantic holes in (the regulators') understanding of the effect this is going to have," he said. "There are literally more questions than answers."
Scalia is the son of U.S. Supreme Court Justice Antonin Scalia.
The Volcker rule was mandated by the 2010 Dodd-Frank financial oversight law to prevent banks that receive government backstops like deposit insurance from making risky trades with their own funds.
Supporters say the rule - named for former Federal Reserve Chairman Paul Volcker - will make the financial system safer and more stable.
Banks and the Chamber of Commerce have strenuously argued that the trading restrictions will have unintended consequences, because it will be hard to distinguish proprietary trading from trades that banks make for their customers' benefit.
If the Volcker rule accidentally cracks down on bank's "market making" trades, it could severely hurt liquidity and the economy, critics argue.
It is one of "the most egregious examples of legislative overreach in Dodd-Frank," said Senator Bob Corker, a Tennessee Republican who also spoke at the event.
Regulators released their Volcker rule proposal in October and are gathering feedback on the more than 350 questions that regulators posed to help them finalize the rule.
The Volcker rule's trading restrictions will have the biggest impact on large banks including Goldman Sachs and Morgan Stanley.
Scalia said the regulators were required by the Administrative Procedures Act and other statutes to do a careful data-based analysis of the economic impact of rule and take into account comment letter feedback.
"Agencies should be imposing no costs on American economy that they believe are unwarranted," he said, noting that the rule would "undeniably" have an adverse effects on market making.
He also said that the regulators have "a great deal of discretion" including authority to carve out additional exemptions for banks.
Last year, Scalia argued on behalf of the Chamber of Commerce and the Business Roundtable to challenge the Securities and Exchange Commission's "proxy access" rule that would make it easier for shareholders to nominate directors to corporate boards.
The U.S. Court of Appeals for the District of Columbia in July struck down the rule, marking the first successful legal challenge to a provision in Dodd-Frank.
The court ruled that the SEC had failed to properly weigh the economic consequences of the new regulations, an argument being used to contest the Commodity Futures Trading Commission's "position limits" rule to crack down on commodity speculation.
Scalia is helping the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association in their case against the position limits rule.
Regarding the Volcker rule, Scalia said on Tuesday he hopes the agencies will properly address the comments they receive through a reproposal.
He said it was "premature" to suggest a lawsuit would be filed.
(Reporting By Alexandra Alper; Editing by Tim Dobbyn)