Republican Representatives Spencer Bachus of Alabama and Randy Neugebauer of Texas, the chairmen of the full committee and the investigations subcommittee, respectively, have opposed the proposal from its inception and have pressured regulators to pull back the scope of the rule.

'Dramatically Reduce Liquidity'

"If the proposed regulations are implemented in their current form, those regulations will dramatically reduce liquidity across multiple markets, which will in turn make it more expensive for businesses to borrow, invest in research and development and create jobs," Bachus, along with Republican Representatives Shelley Moore Capito of West Virginia, Scott Garrett of New Jersey and Jeb Hensarling of Texas, wrote in a Dec. 7 letter to regulators.

Volcker said in a November speech in Singapore that the rule was too complicated and cumbersome, blaming bank lobbyists. He declined to comment for this story.

Former FDIC Chairman Sheila Bair also criticized the complexity of the proposal drafted by regulators, urging them to throw away everything and start again.

"The regulators should think hard about starting over again with a simple rule based on the underlying economics of the transaction, not on its label or accounting treatment," Bair said in congressional testimony last month. "If it makes money from the customer paying fees, interest and commissions, it passes. If its profitability or loss is based on market movements, it fails."

Fund Managers

The four regulators who drafted the rule testified in the morning session of today's hearing. In the afternoon, Douglas J. Peebles, chief investment officer at AllianceBernstein LP, the fund-management unit of French insurer Axa SA, appeared on behalf of Sifma.

Mark Standish, president and co-CEO of RBC Capital Markets and representing the Institute of International Bankers, told the committee that international regulations increasing the amount of capital banks are required to have would do a better job of reducing risk in the financial system than the Volcker rule.

Some fund managers are supporting the banking industry attack on the Volcker rule because they have close business relations, MIT's Johnson said. Non-financial companies did the same when derivatives regulation was being negotiated in 2010, rallying to the side of banks when their own interests weren't necessarily aligned with the financial firms, according to people familiar with the discussions then.

Foreign Governments

Some foreign governments also have criticized the Volcker rule. Canada and Japan sent letters to the U.S. regulators, expressing concern that the trading of their sovereign bonds would suffer if U.S. banks are reluctant to make markets. Congress exempted U.S. Treasuries from the prop-trading ban. Sifma will ask regulators to expand the exemption to other top- rated government bonds such as those issued by Canada, said Rob Toomey, a managing director at the lobbying organization.

"Congress's intent was not to harm market-making, but the rules as proposed by regulators are too onerous," Toomey said.

Even if the Volcker rule does reduce trading in some markets, that might not be so bad, MIT's Johnson said.