Lawsuits Are Anticipated Against Volcker Rule

, New York Law Journal

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WASHINGTON

WHEN FEDERAL financial regulators last week adopted the massive Volcker Rule, it didn't mean their work was finished. If anything, lawyers say the work is just beginning.

Legal challenges to the rule that bars banks from making risky bets with their customers' money are a "virtual certainty," said David Hooper, a corporate partner at Barnes & Thornburg. "The implications [for] banks are so widespread that it is highly likely there will be challenges to the final rule on a number of grounds."

Financial regulatory specialist Keith Fisher, of counsel to Ballard Spahr, agreed. "There's a very high likelihood somebody may try to test the entirety of the rule or specific aspects," he said.

Regulators on Dec. 10 released the 71-page rule, plus another 882 pages of supporting documentation. 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.

A keystone of the Dodd-Frank Act, the final rule was jointly 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 Barack Obama said in a written statement.

Lawyers predicted that groups such as 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. Another tack would be to argue that regulators veered too far from the text of the Dodd-Frank Act in drafting the rule.

Dissents May Bolster Lawsuits

Sharply worded dissents from several agency commissioners spotlight some administrative vulnerabilities in the rulemaking process that could be used in a suit, said Venable partner Andrew Olmem, who recently finished a seven-year tenure at the Senate Banking Com­mit­tee, most recently as the Repub­li­can chief counsel. "Dissents can be very important in a lawsuit," he said. "Courts can look to them and say, 'Even your own principals did not agree that your agency complied with the law.'"

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.

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