US lawmakers in the Senate are moving to reduce the severity of plans to prevent banks from sponsoring and investing in private equity and hedge funds and curb proprietary trading, according to Reuters.

As a result of changes being thrashed out in Washington, banks would be allowed to invest up to 2 per cent of their total Tier 1 capital in hedge funds and private equity funds, under a version of the Volcker rule, according to a document seen by the news service.

More specifically, the document proposes a 3-per cent Tier 1 capital cap on bank interests in hedge fund "seed capital," and a cap on banks' stakes in private equity funds that could not exceed 5 per cent of an individual fund's total capital.

Banks would have five years after the law takes effect to sell off stakes in funds that exceed the proposed caps, according to the document, the news service said.

The “Volcker rule” is named after Paul Volcker, a former chairman of the US Federal Reserve and now a key advisor to the US administration on how to reform the banking system so as to avoid a repeat of the recent financial crisis. The administration has proposed forcing banks to spin off certain supposedly risky activities, such as hedge fund investing. If enacted, such a measure would represent a partial return to the old restrictions enforced under the 1932 Glass-Steagall Act, repealed by the Clinton administration in the late 1990s.

To date, analysts have told this publication that there will be no direct impact on wealth management from any such rule, although there may be effects if it becomes more difficult for banks to directly seed hedge funds and private equity investments. A number of wealth management firms which are part of integrated banking groups make a virtue of their ability to source products and services of investment banking teams working in the same groups.