Could an obscure 1994 law upend the Volcker Rule?
At the end of 2013, five regulatory agencies finally managed to adopt the Volcker Rule, the Dodd-Frank mandated regulation that curbs risky proprietary trading by financial institutions. Regulators from the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Securities and Exchange Commission took more than two years to refine their original proposal, after taking into account the 18,000 comments they received on the trading bars. Now comes the really fun part for the government: defending the 900-page behemoth of a law against the sort of industry-mounted challenges that have already felled shareholder proxy access and resource extraction disclosure rules that the SEC adopted in response to Dodd-Frank.
In a terrific piece Tuesday, my Reuters colleagues Sarah Lynch and Emily Stephenson previewed two possible grounds for a challenge to the Volcker Rule (which is named for former Federal Reserve chairman Paul Volcker, who pushed for a bar on proprietary trading after the financial crisis hit in 2008). Both potential attacks would home in on regulators’ supposed failure to pay enough attention to the impact the new rule would have on financial institutions and the broader economy. According to the story, lawyers for business lobbying groups like the U.S. Chamber of Commerce are looking at the Unfunded Mandates Reform Act, which requires the OCC to assess the economic impact of proposed rules that will cost the government or the private sector more than $100 million. Volcker Rule opponents have been kicking around the idea of a challenge under UMRA for a while, but Dodd-Frank has created some uncertainty about its application. More recently, according to Lynch and Stephenson, the Chamber and other groups have begun to look at a different law that also imposes a cost-benefit analysis requirement on bank regulators: the Riegle Community Development and Regulatory Improvement Act of 1994.
Inspired by the Reuters piece – and by my utter ignorance of the Riegle law – I did some research at Westlaw. The Clinton-era statute turns out to be quite a hodgepodge of a law. Its primary purpose was to encourage small, community-based lending institutions. But it also reformed anti money-laundering and flood insurance laws and included provisions intended to streamline the bank regulatory process. The streamlining section of the law, entitled “Paperwork Reduction and Regulatory Improvement,” includes language that could justify a challenge to the Volcker Rule.
The statute says that when bank regulators, including the FDIC, are determining administrative compliance requirements for new regulations, they must consider “any administrative burdens that such regulations would place on depository institutions” as well as “the benefits of such regulations.” In other words, under Riegle, regulators at least have to weigh the relative administrative costs of the proposed new rule against its benefits. Volcker Rule critics have complained that the OCC, for one, has not put forth an economic impact analysis, despite promising to publish such a report when the rule was adopted last December. (The OCC told Reuters reporters Lynch and Stephenson that its economic impact analysis is being finalized and will be made available when it is complete.)
Riegle’s provisions have been cited on the periphery of the Volcker Rule process. The FDIC’s Office of Inspector General acknowledged the law’s cost-benefit requirements when it provided an evaluation in 2011 of the agency’s obligations in Dodd-Frank rulemaking. Treasury’s inspector general also noted Riegle in its report on Dodd-Frank rulemaking by the OCC. And as my Reuters colleagues reported Tuesday, Congressman Scott Garrett, a New Jersey Republican, pressed Federal Reserve Governor Daniel Tarullo about whether regulators had complied with Riegle’s cost-benefit mandate when they adopted the final Volcker Rule. “A cost-benefit analysis was not done. It was required,” Garrett said, according to Reuters.
So will Riegle slay Volcker? That’s a long shot. If you look closely at the actual language of the law, there’s an awful lot of wiggle room for regulators. The statute merely requires that banking agencies “consider” administrative burdens compared to the benefits of new regulations. Administrative burdens are one form of cost, to be sure, but it’s going to take some extremely creative lawyering to characterize the entire economic impact of the ban on proprietary trading as an administrative burden. The intent of Riegle’s regulatory provisions, after all, was to reduce the time and expense of compliance, especially for smaller institutions – not to do away with regulations mandated by Congress. As Hester Peirce, a senior research fellow at George Mason University and former Senate aide told Lynch and Stephenson, “The language is so weak that I don’t think it would do you much good.”
Nor has Riegle ever been used successfully to challenge any bank regulation. In the 20 years since its passage, the law has turned up very rarely in money-laundering and flood insurance litigation, with only about 80 citations in reported cases. Its cost-benefit provisions have never been cited in litigation, according to an exhaustive search by a Westlaw reference attorney. They’ve cropped up in a couple of administrative decisions and guidance issuances from the FDIC and OCC, but mostly in addressing how quickly regulations will take effect. There’s simply no precedent at all for attempting to block a new rule with Riegle.
That alone, according to banking lawyer William Sweet of Skadden, Arps, Slate, Meagher & Flom, doesn’t rule out a Riegle-based challenge to Volcker. “The fact that no court has issued a decision in reliance upon this authority does not say anything about its efficacy as a legal requirement,” Sweet told me by email. Banks are generally reluctant to challenge their regulators, so it’s not that big a surprise that Riegle hasn’t generated more precedent.
But it’s also true that when the Business Roundtable and the Chamber of Commerce cited the SEC’s obligation to conduct a cost-benefit analysis when they sought to overturn the Dodd-Frank shareholder proxy access rule, they were building on a foundation of precedent that established the SEC’s “unique obligation” to weigh the economic impact of new regulations. In fact, when the D.C. Circuit Court of Appeals struck down the proxy access rule, its opinion noted that the SEC had “failed, once again” to assess economic impact, citing two recent previous decisions in which the appeals court had reached the same conclusion. There’s no similar body of law on Riegle requirements for banking regulators.
Volcker Rule opponents searching for a handhold might want to look as well at the FDIC’s own rules for itself. In a self-initiated policy statement published in April 2013, the agency set forth the principles that guide its rulemaking. At the top of the list, once the FDIC has established the need for a new rule, is to “evaluate benefits and costs, based on available information.” Perhaps business groups can argue that the FDIC failed to comply with its own policy when it adopted the Volcker Rule.
(Reporting by Alison Frankel)