Wall Street heads to court to fend off Biden's regulators
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[November 21, 2023] By
Michelle Price and Carolina Mandl
WASHINGTON (Reuters) - Facing a wave of new rules and encouraged by a
sympathetic judiciary, U.S. financial firms and their trade groups are
growing bolder about fighting Democratic President Joe Biden's
regulators in court.
From fair lending requirements and increased investor disclosures, to
bank capital hikes, a slew of new rules aimed at lenders, funds and at
other companies threaten to increase compliance costs and dent profits.
Biden's regulatory appointees were given a mandate to take on perceived
corporate profiteering, bolster rules relaxed by the Republican former
President Donald Trump's administration, and address Democratic
priorities such as income inequality and climate change. This year's
bank failures have only bolstered their cause.
Multiple industry executives said firms are more willing to litigate
than in the past because the regulations are frequently ill-conceived
and rushed, and will ultimately hurt consumers, investors and the
economy.
Over the past 18 months, more than 30 companies and trade groups
representing banks, funds and other firms have brought at least 15 suits
against financial regulators over major rules, policies and supervision
issues, according to a Reuters tally. Historical litigation data was not
immediately available.
Most of the suits allege violations of the Administrative Procedure Act
(APA) which requires regulators to justify rules and allow time for, and
fully consider, public feedback.
"The regulatory agencies are more willing to cut corners. They're giving
industry short comment periods and they're not going through the APA
process," said Tom Quaadman, an executive vice president at the U.S.
Chamber of Commerce.
The group usually has one active case against financial regulators, but
currently has two against the Securities and Exchange Commission (SEC)
and one against the Consumer Financial Protection Bureau (CFPB), he
said.
Others are suing for the first time. In September, six industry groups
including the Managed Funds Association (MFA) and Alternative Investment
Management Association (AIMA) alleged in a filing with the Fifth Circuit
Court of Appeals that SEC private fund rules violated the APA, the
pair's first suit against a regulator.
"Ordinarily, litigation against a national regulator is not a course of
action we would seek to pursue," said AIMA CEO Jack Inglis, but the
group felt "compelled to" because the SEC overstepped its authority and
didn't account for legitimate industry concerns.
Spokespeople for the MFA and CFPB declined to comment.
The SEC "undertakes rulemaking consistent with its authorities and laws
governing the administrative process, and we will vigorously defend
challenged rules in court," an SEC spokesperson said.
"These rules are incredibly important to protecting consumers,
investors, and financial stability," said Dennis Kelleher, CEO of
nonprofit Better Markets. "Knowing their every action is under a
litigation microscope, the regulators are being very careful to follow
the letter and spirit of the laws."
To be sure, the financial regulators have been sued many times during
previous administrations, including by pro-reform advocacy groups.
But some executives said the industry is also emboldened by a more
conservative judiciary wary of regulatory overreach.
Trump appointed 54 judges to the U.S. appeals courts, where many suits
against federal agencies are filed. He also pushed the Supreme Court to
a 6-3 conservative majority.
The majority of the suits were filed in conservative leaning courts,
including seven in the Fifth Circuit's jurisdiction, which has become a
magnet for litigation against Biden regulators.
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U.S. President Joe Biden walks from the Oval Office to Marine One on
the South Lawn at the White House in Washington, November 14, 2023.
REUTERS/Tom Brenner/File Photo
Last year's Supreme Court decision curbing the Environmental
Protection Agency's powers, which raised doubts over whether other
federal agencies have the authority to tackle major policy
questions, was also a positive development for the industry,
executives said.
The Chamber, American Bankers Association and others in September
won a case against the CFPB over changes to the agency's exam manual
partially on the "major questions" grounds. Crypto companies have
also cited the major questions doctrine when disputing the SEC's
authority to regulate them.
Speaking at an industry event last month, Eugene Scalia, Gibson Dunn
partner who has sued the government many times and is representing
the industry in the private funds case, noted the judiciary,
including the Supreme Court, is very focused on addressing abuses by
the administrative state.
"Part of what you're seeing is regulated entities recognize that and
are more comfortable now coming to the courts when they think
something's been done that's unfair or wrong," he said.
"There are some financial regulators that are walking right into
it," he added.
Scalia, former Labor Secretary and son of the late Supreme Court
Justice Antonin Scalia, did not respond to a comment request.
Some plaintiffs said the political leaning of the courts was not a
motivating factor and pointed out that the Fifth Circuit Court of
Appeals last month upheld the SEC's approval of Nasdaq's board
diversity rule.
"You still have to make the arguments," said Quaadman.
'LAST RESORT'
Traditionally, banks and investors have been reluctant to sue and
risk souring relations with regulators they work with daily, or
drawing adverse public scrutiny. Many prefer to sue through trade
groups and it's not a decision taken lightly.
"It's our last resort," said Rebeca Romero Rainey, CEO of the
Independent Community Bankers of America, which in August joined a
lawsuit challenging a CFPB data collection rule. "The hope would be
that we could resolve these issues through other means."
But as agencies increasingly ignore industry concerns, firms feel
they have little to lose, executives said, adding more litigation is
being considered.
In September, for example, bank groups accused regulators including
the Federal Reserve of violating the APA with a new capital rule.
At the same event, Scalia said he saw flaws in the way regulators
were handling feedback on the rule which, if not rectified, "will be
a vulnerability when litigation does occur."
According to research by Wharton School professor David Zaring,
neither industry groups nor individual lenders have filed more than
one suit over the past decade challenging Fed policymaking.
The Fed declined to comment, but officials say they welcome input
and have given the industry more time to feed back.
"With this many judges in courts biased in favor of the industry, it
would be irrational for the industry not to sue," said Kelleher.
(Additional reporting by Douglas Gillison, Chris Prentice, Pete
Schroeder, Nate Raymond, Jody Godoy, Megan Davies and Paritosh
Bansal; Editing by Nick Zieminski)
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