By Sarah N. Lynch and Emily Stephenson
WASHINGTON Feb 12 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
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
Michael Piwowar, a Republican SEC commissioner who voted
against the Volcker rule, said regulators should scrap it and
"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
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
Some experts say a lawsuit over the Riegle Act is a long
"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."