The coordinated action by five separate regulatory agencies is seen
sparking a court challenge as Wall Street tries once again to avoid
one of the harshest elements of the post-financial crisis crackdown.
The rule, championed by former Fed Chairman Paul Volcker, was a
last-minute addition to the 2010 Dodd-Frank Wall Street reform law
and takes aim at a business that had been a big money spinner for
banks before the crisis.
The measure bans banks from making bets for their own profits, an
activity known as proprietary trading that regulators deemed too
risky for banks that enjoy government backstops.
But banks argue the roughly 800-page rule will hurt markets because
it is virtually impossible to distinguish profit-seeking trades from
those needed to hedge against risks or trades executed on behalf of
"For something of this magnitude and this controversial ... there
will be somebody who will challenge it," said Brian Cartwright, an
advisor at consultancy Patomak Global Partners and a former general
counsel at the Securities and Exchange Commission, one of the
agencies voting on the measure.
Banks had hoped the rule would be watered down from when it was
proposed more than two years ago, but JPMorgan Chase & Co's $6
billion loss in 2012 — named the London Whale after the giant
trading bets the bank took — put an end to that speculation.
The final rule is expected to tighten potential loopholes, and could
trim billions of dollars in annual revenues from large banks
including Goldman Sachs, Morgan Stanley and JPMorgan.
Legal experts have identified three possible avenues of attack once
the rule becomes final. Banks could challenge on procedural grounds,
including that they did not have an adequate chance to comment on
major new elements the final rule contains from when it was proposed
two years ago.
They could also argue that certain regulators did not sufficiently
analyze the costs and benefits of the rule.
And lastly, they could argue that parts of the rule hammered out by
the regulators contradicts the Dodd-Frank law.
The five agencies involved in Tuesday's final vote are the Federal
Reserve, the Federal Deposit Insurance Corp, the Office of the
Comptroller of the Currency (OCC), all bank regulators, plus the SEC
and the Commodity Futures Trading Commission.
Few banks are expected to individually challenge their supervisors.
Lawyers working on these issues said the likely candidates to sue
were the industry groups that have done so against other Dodd-Frank
These groups, such as the U.S. Chamber of Commerce and the
Securities Industry and Financial Markets Association, have so far
been coy about whether they will challenge the Volcker rule.
A hurdle for possible litigants is that regulators have in all
likelihood blocked some of the most obvious routes for a lawsuit,
these lawyers said, potentially making a lawsuit a risky and costly
"The agencies have been very attuned to the fact that there are many
who would litigate about what comes out here," said Satish Kini,
co-chair of the banking group of Debevoise & Plimpton, a law firm in
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Banks could use procedural arguments under the Administrative
Procedures Act, which bans regulators from writing rules that are
"arbitrary and capricious."
If the final rule is tougher and contains substantially new
elements, they could argue they didn't have a chance to comment on
those elements, despite already having sent in 17,000 comment
letters to regulators on the proposed rule.
"(Regulators) have to be quite careful that any changes are within
the scope of the proposal," said Scott Cammarn, a partner at law
firm Cadwalader, Wickersham & Taft LLP.
But the proposed rule was already very detailed, said another lawyer
who asked not to be named, containing more than 350 questions the
industry was asked to respond to.
Banks could also argue that some of the regulators failed to meet
requirements to conduct proper cost-benefit analyses weighing the
economic impacts of the rule.
Wall Street trade groups have already successfully used this tactic
to defeat other Dodd-Frank rules from the CFTC and SEC, including
one that would have made it easier for shareholders to nominate
directors to corporate boards.
The OCC could be particularly vulnerable to this tactic.
Under a federal law known as the Unfunded Mandates Reform Act, the
OCC must prepare a budgetary statement if a rule will cost either
the government or the private sector more than $100 million, but it
decided not to do so.
The Chamber of Commerce has already deemed that decision "clearly
erroneous", in a November letter to regulators.
But attacking an individual agency is a tricky strategy and the
largest Wall Street banks are under Fed oversight.
"If you can't challenge the regulation that applies to bank holding
companies (under the Fed), then it doesn't do you all that much good
to succeed in a challenge against the other regulations," said
Banks could also argue that the rule hammered out by the regulatory
agencies contradicts the Dodd-Frank law, for instance if it
restricts activities that Congress intended to permit such as
hedging or market-making.
Judges could be wary about wading into complex trading matters, said
Cartwright: "They need to be persuaded that they understand it well
enough to know that what was done was arbitrary and capricious."
(Additional reporting by Emily
Stephenson; editing by Karey Van Hall and Tim Dobbyn)
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