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.