Challenges to New Volcker Rule a 'Virtual Certainty'
Given the Volcker Rule's scope and magnitude, lawyers warn that legal challenges are practically inevitable.
Regulators released the massive rule—which weighs in at 71 pages, plus another 882 pages of supporting documentation—on Tuesday. It bars banks from making short-term proprietary trades, while exempting certain activities including market-making. The rule also requires new accountability from corporate chiefs.
"When a regulatory initiative with such far-reaching implications as the Volcker Rule is adopted, it is a virtual certainty that it will face legal challenges," said David Hooper, a corporate partner at Barnes & Thornburg.
"There's a very high likelihood somebody may try to test the entirety of the rule or specific aspects," agreed financial regulatory specialist Keith Fisher, of counsel at Ballard Spahr.
Mandated by the Dodd-Frank Act, the final rule was released by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission and the Securities and Exchange Commission.
"Our financial system will be safer and the American people are more secure" because of the rule, President Obama said in a written statement.
Lawyers predicted that groups including the U.S. Chamber of Commerce, the American Bankers Association or the Securities Industry and Financial Markets Association would be most likely to challenge the rule. Individual banks would hesitate to openly confront their regulators, said White & Case partner Ernest Patrikis, who served in senior positions including general counsel for 30 years with the Federal Reserve Bank of New York. "They'll use a trade association," he said.
A Chamber spokeswoman said in an email that the group "will carefully examine the final rule and take all options into account as we decide how best to proceed."
A lawsuit might challenge the rule as a whole under the Administrative Procedure Act or target specific provisions such as the CEO attestation requirement or the extension of regulation to foreign banks, lawyers said.
Reed Smith partner Michael Bleier, a former assistant general counsel to the Federal Reserve Board who also served as the general counsel of Mellon Bank, predicted that any lawsuit would face "an uphill battle."
"The statute gives lots of discretion to the agencies," he said. "It was pretty clear what Congress wanted the agencies to do. The only issue is how it's implemented."
A challenge would likely focus on whether the agencies gave stakeholders an opportunity to comment—and whether the agencies took the comments into account.
The agencies received about 18,000 comments, although all but roughly 500 were virtually identical form letters. Some substantive comments, however, ran more than 100 pages long, he said.
Patrikis said the agencies made " many changes” including “massive rewriting” between the draft version and the final rule. As a result, questions may arise about whether stakeholders had adequate opportunity to comment, especially if the changes made the rules stricter. "I always felt that if you make a rule harsher, it should go up for comment again," he said.
Another avenue would be to challenge the agencies' cost/benefit analysis—a popular tactic in suits against the SEC and other agencies. But given the nearly 900 pages of explanation accompanying the rule, "my gut tells me that it's not too likely" such a challenge would succeed, Jones Day banking and finance partner Joel Telpner said.
Ellen Marshall, a banking, corporate and finance partner at Manatt, Phelps & Phillips, said in an email that lawsuits might take time to ripen.
"Applying these rules will involve line-drawing, such as when a hedge position is considered to be related to a specific asset or liability and when it is merely part of an overall portfolio management strategy," she said. "Or when an investment, though held for longer than 60 days, is not held for investment. These sorts of line-drawing issues are likely to take years to develop."
In the short term, Marshall said, the CEO attestation requirement could prove vulnerable to a challenge. The provision, not included in the original draft, would require bank executives to personally guarantee that their institutions are in compliance with the law. She also flagged the extension of regulation to foreign banks, which could be viewed as "beyond the scope of the statute.”
Banks have until July 2015 to comply—a one year extension. As a result, there's "no all-fired rush to go to court.” Fisher said. “I think people will wait until the compliance date is closer until they resort to judicial review."
He continued, "They'll have time to come to grips with this and consider if it requires some kind of litigation or not, or if it can be managed."
Contact Jenna Greene at email@example.com.