Banks Draw Out Their Knives
Legal challenges appear in store for Volcker rule.
A commissioner at the Commodity Futures Trading Commission, Scott O'Malia, blasted the agency for allegedly violating administrative procedures, writing that "the Commission seems to have forgotten the basics of agency rulemaking. I am deeply troubled by the egregious abuse of process in this rulemaking." O'Malia alleged that chairman Gary Gensler excluded commissioners from negotiations, and he said the final rule lacked "due process and clarity in its enforcement procedures."
SEC commissioner Daniel Gallagher dissented as well, saying that the rulemaking was rushed and that he was not given enough time to review the draft. "Under intense pressure to meet an utterly artificial, wholly political end-of-year deadline, this Commission is effectively being told that we have to vote for the final rule so we can find out what's in it," Gallagher said. He called the rule a "massive, untested governmental intrusion into a vital segment of our economy."
A legal challenge might 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. The biggest problem, White & Case's Patrikis said, is that the agencies subsequently made "many changes" and undertook "massive rewriting" between the draft version and the final rule. A key legal question is whether stakeholders had an adequate opportunity to comment on the final provisions, especially in instances in which the changes made the rules stricter. "I always felt that if you make a rule harsher, it should go up for comment again," Patrikis said.
SEC commissioner Michael Piwowar voted against the final rule for this reason. "The final rule adopted today is substantially different from the rule that was proposed over two years ago. In my view, the extent of these changes necessitates a reproposal of the rule and an opportunity for public comment," he wrote in his dissent.
Another avenue would be to challenge the agencies' cost/benefit analysis — a popular tactic in suits against the SEC and other regulators. 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 attest that their institutions have proper procedures in place to ensure 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."
Still, 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."