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The Senate approved an amendment Tuesday to the regulatory reform bill that would give federal regulators more leeway to preempt state laws but still allow state attorneys general some enforcement power over national banks.
May 18 -
WASHINGTON — Large banks have repeatedly prevailed in battles to preserve federal preemption in Congress and the courts, but that victory string is likely to be broken by the regulatory reform bill being debated in the Senate this week.
May 3 -
The Senate bill would explicitly return to the so-called "Barnett" standard that existed before the preemption rules issued by the Office of the Comptroller of the Currency in 2004. But the bill also contains language that OCC officials warned would make preemption more complex and burdensome.
March 17 -
The deal would let the OCC keep broad leeway to preempt consumer protection laws — a far cry from the Obama administration's initial effort to eliminate preemption entirely.
December 10 -
The principal argument for national preemption — that states would run amok, crafting conflicting rules that would make doing business nationwide impossible — is undercut by recent history.
October 16
WASHINGTON — While both the House and Senate financial reform bills claim to restore the so-called Barnett standard for preemption of state law, that has not stopped federal and state regulators from continuing to battle over the issue.
The Office of the Comptroller of the Currency and the banking industry are backing the Senate version, which they argue more explicitly restores that standard and would protect decades of precedent surrounding the issue. State regulators and consumer groups prefer the House provision, which they view as more flexible and which would force the OCC to take additional steps before preempting a law.
"The Senate bill is in my mind just hugely preferable," said Howard Cayne, a partner at Arnold & Porter. "The benefit of the Senate version is it doesn't reopen for years of litigation questions, close calls that have been resolved."
At issue is the 1996 Barnett Supreme Court case, which said that the OCC could preempt state law on a case-by-case basis. Though lawmakers in both chambers claim that is their goal, the Senate bill explicitly references the Barnett decision, while the House borrows some of its wording but does not name it.
Instead, the House version says that the OCC can preempt a law if it "prevents, significantly interferes with, or materially impairs" the business of banking.
Banking lawyers see that as a big difference, saying its failure to cite the case and addition of new language could make it harder for the OCC to win a court fight over preemption.
"The House bill establishes a new standard for determining if a state law is preempted," said Ray Natter, a partner at Barnett Sivon & Natter PC. "While this standard is intended to be the same as the standard used by the Supreme Court in the Barnett case, the fact that it does not cite the case can create some questions."
The House language also would force the OCC to take additional steps before preempting a statute, including proving that a substantive federal law exists that tackles the same issue the state law is trying to address. "This creates a new requirement not found in current law, and no doubt that would lead to extensive litigation over whether this hurdle had been met," Natter said. "It is for these reasons that the Senate bill is closer to the stated congressional goal of maintaining the Barnett case."
Art Wilmarth, a professor at George Washington Law School, said there will be an increase in litigation no matter which side prevails. "If the House bill gets passed, the whole focus is going to be on the words 'materially impair,' " he said. "If the Senate language passes, the question is going to be what is the Barnett standard. Either way, there is going to be a lot of litigation over what the standard is."
The OCC and bankers said they would have a better shot of winning those court battles if the Senate version were adopted. By explicitly referring to the Barnett case, the courts will defer to other precedents concerning that decision. "We think it's important that precedent that's been in place for 150 years be preserved," said Ken Clayton, chief legislative counsel for the American Bankers Association. "We think the Senate version is clearer in directing the courts in what Congress meant."
Several cases since Barnett have relied on that decision, including the 2007 Supreme Court case Watters v. Wachovia, which said that the operating subsidiaries of national banks enjoy the same preemption powers from state consumer protection laws as their national bank parents.
"What we have with Barnett is a series of court cases that have followed Barnett so we know what courts would likely do with Barnett," said Robert Cook, a partner at Hudson Cook LLP. "You have to think that a court looking at the House version will first say they didn't adopt the Senate language, so they must mean something different, so right off the bat you are going to get something different."
But John Ryan, an executive vice president at the Conference of State Bank Supervisors, said the point of the bill is not to reaffirm existing law.
"By that argument we'd really be saying this is all for nothing," he said. "I don't think we've had such a big debate to come to a result that is purely a blessing of what the OCC has already done."
Some industry representatives said that no matter which version is included in the final bill, bankers have already lost on the issue.
"I don't like either quite frankly, because I think both will lead to confusion and litigation," said Richard Hunt, president of the Consumer Bankers Association. "It's like asking which sister do I want to kiss. … Don't think we are up here jumping for joy that the Senate measure was a little more measured than the House language. If they accept the Senate language it will still be problematic."
The House and Senate preemption provision also differ on how much power to give state attorneys general. While both bills would give them more authority than they currently have, the House bill would let state AGs enforce any federal law against national banks. The Senate bill, however, would only allow states to enforce federal rules promulgated by a new consumer protection regulator. The Senate bill also limits AGs to actions within their own states.
Although the OCC and bankers oppose both provisions, if forced to choose they would pick the Senate version. "It's not only the law that's out there, but it's the types of cases you bring and the positions you take in court," said Ron Glancz, a partner at Venable LLP. "You need uniformity. If you have 50 AGs, they are going to argue the same federal law, but they are going to have discretion on their interpretation."
Clayton said that even if the Senate version prevails on that issue, there could be trouble.
"We believe it's an invitation to politicizing bank regulation," he said. "In some respects it may more greatly complicate it, because now you will have varying states seeking to litigate enforcement in ways that may or not be consistent with what the [consumer agency] or OCC want to do."
He suggested the change may not even be necessary if the administration is creating a strong consumer agency. "It does open the question of why you would need to up end the current state of play of preemption," he said.
But Ryan said national banks should face additional enforcement, like other businesses. Why do national banks "deserve protection that almost no one else in our economy gets?" he said. "Why do they get excluded from enforcement at the state level when the biggest car companies, oil companies, Wal-Mart gets subjected to it? What social function are they performing that would exempt them from the full range of possibilities our democracy presents?"
What version will ultimately prevail remains unclear. Sen. Tom Carper, D-Del., who authored the provision in the Senate bill, said last week he was confident it would be included in the final bill. Some analysts agree.
"I suspect the compromise on the Senate side will carry the day," said Raj Date, the chairman of the Cambridge Winter Center for Financial Institutions Policy.
