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OK, here at DFRW we may get wonkish about the nuts and bolts of the Dodd-Frank Act, but let’s face it, the topic unlikely to fire up passion in the average Joe. It’s unlikely we'll hear much about the legislation at the Republican convention in Tampa this week. "Instead, count on hearing in more general terms about overregulation and the burden it imposes on small business," writes American Banker’s Kevin Wack.
August 29 -
You can't claim to be a victim of watchdogs and at the same time blame watchdogs for being dumb, inept and disorganized.
July 19 -
If regulators continue to sting banks with overzealous enforcement actions and ill-conceived policies, they, like the scorpion in Aesop's fable, could find themselves up the creek without a frog or paddle.
November 16
With so many prominent Dodd-Frank regulations expected to be finalized and Financial Stability Oversight Council designations anticipated in 2013, expect a significant uptick in judicial challenges to administrative actions by financial institutions.
Tools, such as a rediscovery of the Administrative Procedure Act and statutory cost-benefit analysis requirements, have already been successfully used in comments or court challenges involving actions proposed to be taken by the FSOC and the Securities and Exchange Commission. Here is a summary of the requirements and defenses that usually form the basis for any administrative challenge. These tools can be used by banks to challenge unauthorized or defective rules or agency determinations. Such challenges, therefore, are usually brought only in egregious cases.
Adequate Statutory Authority: An absence of statutory authority is the clearest way to challenge and invalidate a regulatory action. An agency may draft a regulation or take an action only to the extent consistent with the terms and intent of the statute.
For example, the FSOC proposed a regulation regarding the designation of systemically important financial institutions. But after comments were filed pointing out that the FSOC has no rulemaking authority under Title I of Dodd-Frank, it recharacterized the rule as "interpretive guidance"—a category of administrative action that does not carry the force and effect of law (unlike a substantive regulation authorized by statute).
Cost-Benefit Analysis Requirements: Cost-benefit analysis arguments are potent weapons that challengers may use to police the agencies' exercise of their statutory authorities. This can be seen in several recent cases invalidating final SEC regulations.
In Business Roundtable v. SEC, American Equity Investment Life Ins. Co. v. SEC and U.S. Chamber of Commerce v. SEC, the courts vacated rules because the SEC acted in an "arbitrary and capricious" manner by failing to determine the rules' "likely economic consequences" and other impacts, as required by law.
As rules are promulgated by other agencies that have greater and greater impacts on the economy, it is likely that challengers will increasingly focus their judicial review arguments on whether those agencies have conducted an adequate and meaningful analysis of the costs and benefits of their proposed rules. Challengers may argue that an adequate cost-benefit analysis should be viewed as part and parcel of any reasonable agency action, and that the failure to do so renders the agency action arbitrary and capricious.
Arbitrary and Capricious Standard: An agency's final determination may be invalidated if it is arbitrary or capricious. That is generally a high standard to reach simply because the agency need only demonstrate that its determination was reasonable under the circumstances. In that regard, however, an agency is required in its statement of basis and purpose (preamble) that accompanies a final regulation to evaluate fairly the arguments made by the comments and rationally dispose of them, whether positively or negatively. Inevitably, this occurs in a limited context favoring the agency, since the agency ultimately determines what constitutes the administrative record before the court in the event of a challenge.
Exhaustion of Administrative Remedies: Agencies may defend against administrative challenges by asserting that the challenger failed to exhaust its administrative remedies before suing. In essence, if a challenge had not been contained in a comment filed with the agency, the agency may seek to dismiss the challenge based on the exhaustion doctrine. That may be countered by assertions that the agency substantially changed the regulation between proposal and final adoption, or that the agency did not give the public a fair opportunity to comment on the issue.
An agency's action may also be challenged based on a variety of other administrative and procedural defects. For example, to the extent that an agency decision maker demonstrates bias or a predisposition before or during a rule-making proceeding, it may be possible to disqualify that decision maker from the process.
Similarly, where an agency decision maker has engaged in ex parte communications with parties outside the agency during the rule-making proceeding, challenges may be brought to invalidate the regulation, or disqualify those who engaged in the improper communications.
The rebirth of administrative challenges to regulations and agency determinations is inevitable as more agencies regulate more companies in more ways in the brave new world of Dodd-Frank. Given the cost of regulation, those companies will want to minimize the scope and costs of such regulation. In some cases, the courts will be the only avenue for achieving that balance.
Thomas P. Vartanian is chair of Dechert LLP's Financial Institutions practice, and was General Counsel of the Federal Home Loan Bank Board in the Reagan Administration. Prior to that, he served as senior trial lawyer and special assistant to the chief counsel at the OCC. Steven G. Bradbury is a litigation partner at Dechert LLP, and he previously served as the head of the Office of Legal Counsel at the U.S. Department of Justice.
