Critics Claim Volcker Rule Skirts Cost-Benefit Laws
February 12, 2014
Sarah N. Lynch and Emily Stephenson
Opponents of the Volcker rule, which bans U.S. banks from proprietary trading, are exploring whether regulators violated two obscure laws that require them to study the costs to business, a move that could lead to a possible legal challenge.
The U.S. Chamber of Commerce says bank regulators appear to have failed to meet their obligation to fully study the Volcker rule's cost to the financial industry and the economy.
Lawyers for the business lobby group are combing through the 1995 Unfunded Mandates Reform Act, which the Office of the Comptroller of the Currency (OCC) has said directs it to assess the economic impact of any new rule that will cost the government or private sector $100 million or more.
The lawyers are also looking at the Riegle Community Development and Regulatory Improvement Act, which requires the Federal Reserve, the Federal Deposit Insurance Corp and the OCC to weigh "administrative burdens" on banks, including small banks and their customers, against the rule's benefits.
"We are still doing our analysis with the Volcker rule, but clearly I believe that the banking regulators are ... on notice going forward," said Tom Quaadman, a vice president at the Chamber of Commerce's Center for Capital Markets Competitiveness.
The Chamber has not yet decided if it will file a lawsuit. It is unclear whether either law could successfully be used as part of a challenge.
However, this area has been a weak spot for regulatory agencies that face tougher cost-benefit analysis requirements than the banking regulators.
In 2011, for instance, an appeals court struck down a rule that made it easier for shareholders to nominate corporate directors. It said the U.S. Securities and Exchange Commission's analysis of the rule was flawed.
The Volcker rule takes its name from former Federal Reserve Chairman Paul Volcker, who promoted the reform to rein in banks' risky trades after the financial crisis in 2007-2009. The rule, which is a central part of the Dodd-Frank law of 2010, is considered a ripe target for lawsuits because of its far-reaching impact on Wall Street.
Before the final rule was available, Standard & Poor's said the strictest version could wipe out billions in trading profits. After the rule was finalized, S&P said the impact would probably not be so bad.
Whether the Unfunded Mandates Reform Act could factor into a legal challenge is unclear. The law says the OCC must do a study before a new rule is proposed and before it is finalized, but it also says a rule cannot be overturned in court based solely on the government's failure to do so.
Moreover, the Dodd-Frank law has created some legal uncertainty about whether UMRA still applies, after it made the OCC more independent.
When the Volcker rule was proposed in October 2011, the OCC said an economic study was not needed because the cost impact did not reach UMRA's $100 million threshold. After the Chamber and others wrote letters to complain, the OCC reversed course.
When the Volcker rule was adopted in December 2013, regulators said the impact would exceed $100 million and, in a document explaining the rule, included a link where the study would be posted online.
The link never worked. When the final rule was formally published on Jan. 31, 2014, the mention of the OCC study and the link were not included.
"This is a disturbing reflection of how some financial regulatory agencies are treating the economic analysis required by Congress," said Eugene Scalia, a partner in the Washington office of Gibson, Dunn & Crutcher, who has led successful challenges to several federal regulations. "When you're regulating the U.S. economy, the economic consequences should be a paramount consideration that's baked into the process from the start."
Michael Piwowar, a Republican SEC commissioner who voted against the Volcker rule, said regulators should scrap it and start over.
"Having failed to publish a regulatory impact analysis, I am troubled by what appears to be a willful disregard for the law," Piwowar told Reuters.
An OCC spokesman said regulators carefully weighed public comments about costs before adopting the rule.
"The OCC's economic impact analysis is still being finalized and will be made available when complete," spokesman Bryan Hubbard said.
Proponents of the Volcker rule say business groups are grasping at weak arguments.
"This is really no more than Wall Street's allies trying to find any way they can to stop financial reform," said Dennis Kelleher, the head of the pro-reform group Better Markets and a former attorney at Skadden, Arps, Slate, Meagher & Flom. "I think they are going to be unsuccessful here."
GOING AROUND THE RIEGLE ACT
While the Chamber has been warning for months about the OCC's compliance with the Unfunded Mandates Reform Act, questions about the Riegle Act surfaced only recently.
Republican Representative Scott Garrett of New Jersey said during a Feb. 5 hearing that he thought regulators skirted their requirements under the Riegle Act.
"A cost-benefit analysis was not done. It was required," Garrett said. "I would like an explanation in writing from each one of you on the panel as to why you did not comply with that."
Federal Reserve Board Governor Daniel Tarullo replied that the regulators had been compelled by Congress to ban proprietary trading by banks.
Asked a similar question at a hearing a week later, Fed Chair Janet Yellen said decisions about costs and benefits were "decided by Congress."
Quaadman, of the Chamber, said he does not believe anyone has challenged a bank regulation using the Riegle Act, and it was too soon to say whether the Chamber would be the first to try it.
Some experts say a lawsuit over the Riegle Act is a long shot.
"It's not clear, but I think someone trying to bring a case based on that provision would have a really difficult time," said Hester Peirce, a senior research fellow at the Mercatus Center at George Mason University, who previously worked for the ranking Republican on the Senate Banking Committee when the Dodd-Frank law was being written. "The language is so weak that I don't think it would do you much good."