WASHINGTON - Wachovia Corp., the U.S. government, and scores of banking groups have filed briefs with the Supreme Court in response to the most serious challenge in a decade to the Office of the Comptroller of the Currency's preemption powers.
In briefs filed late Friday the Charlotte banking company and its supporters wrote that Congress granted the agency exclusive powers to regulate national banks and their operating subsidiaries, and they rejected arguments from state regulators that operating subsidiaries must comply with local laws.
The briefs are a preview of what Wachovia is expected to say in oral arguments before the high court Nov. 29.
The case stems from a relatively narrow challenge to OCC rules that say operating subsidiaries are as protected from state laws as national banks. But it is the first preemption case to reach the Supreme Court in more than a decade, and it reached the court amid a spate of efforts by state regulators and consumer groups to chip away at the OCC's preemption power.
Wachovia and its supporters argue that the National Bank Act authorizes federally chartered institutions to conduct lending activities through operating subsidiaries, and that the Gramm-Leach-Bliley Act of 1999 said subsidiaries should operate under the "same terms and conditions" as their parent banks.
That would not be true if operating subsidiaries had to comply with state laws, Wachovia and its supporters said.
"Requiring examination and supervision by 50 states and numerous local governments is not the same regulatory 'terms and conditions' as requiring examination and supervision by a single federal agency," said Wachovia's brief, written by Washington lawyer Robert A. Long.
Wachovia is backed by several allies, including the federal government, which also stressed that the financial reform law ensured that national banks and their operating subsidiaries face identical regulation.
"An operating subsidiary subject to a host of state regulations inapplicable to the parent bank could hardly be said to operate under the same terms and conditions," wrote Solicitor General Paul D. Clement.
The case is a test of a broad 2004 rule that asserted the OCC's right to preempt most state laws for national banks and their operating subsidiaries. The rule followed a more specific one in 2001 that said state laws preempted by the National Bank Act for federal institutions also would not apply to state-chartered operating subsidiaries.
After becoming a wholly owned operating subsidiary of Wachovia Bank in 2003, Wachovia Mortgage informed Michigan that it would no longer comply with state laws that required mortgage brokers and lenders to register with the state and allowed its regulators to investigate consumer complaints.
The U.S. District Court for the Western District of Michigan and the U.S. Court of Appeals for the Sixth Circuit in Cincinnati ruled in Wachovia's favor. Three other appellate courts also have upheld the OCC regulation.
However, the Supreme Court said in June that it would hear an appeal on the Wachovia case - an unusual move, since the lower courts were in agreement on the issue. Opponents of the rule for operating subsidiaries have argued that the Supreme Court will likely overturn it, while the OCC's supporters have said the court may want only to quell future challenges by issuing a strong affirmation.
Linda Watters, the commissioner of the Michigan Office of Insurance and Financial Services, and other state banking regulators have continued to argue that the OCC overstepped the National Bank Act by shielding operating subsidiaries of national banks from state regulation.
They are supported by AARP, the National Association of Realtors, the National Conference of State Legislatures, and the Center for State Enforcement of Antitrust and Consumer Protection Laws, which filed briefs Sept. 1 that protested the OCC rule.
Among other things, Ms. Watters raised a constitutional objection to the rule, arguing that it encroaches on state "police powers" safeguarded by the 10th Amendment.
In its brief, Wachovia spent little energy responding to this argument - a signal the company may view it as a minor factor in the high court's decision - and argued that the rules were different from previous federal laws the court had struck down for infringing on state sovereignty.
"This is not a case in which the federal government seeks to 'commandeer' state officials to carry out a federal program," Wachovia wrote.
Wachovia also disputed Ms. Watters' interpretation of Section 484 of the National Bank Act, which prevents states from exercising "visitorial," or supervisory, powers over national banks. She argued that because state-chartered operating subsidiaries are not themselves national banks - they cannot join the Federal Reserve System or obtain Federal Deposit Insurance Corp. coverage, for example - the section did not extend to them.
But banking groups said operating subsidiaries did enjoy bank powers.
"Section 484 was enacted a full century before national bank operating subsidiaries existed," the American Bankers Association wrote in a brief authored primarily by Theodore Olson, a former solicitor general.
Congress passed the National Bank Act in 1864, and national banks did not begin to establish operating subsidiaries until 1966.
The ABA brief was submitted on behalf of America's Community Bankers, the Consumer Bankers Association, the Consumer Mortgage Coalition, the Financial Services Roundtable, the Mortgage Bankers Association, and 58 state and regional bankers' associations. The brief was authored partly by John D. Hawke Jr., the comptroller at the time the 2001 and 2004 regulations were issued.
The Clearing House Association LLC, the U.S. Chamber of Commerce, the Competitive Enterprise Institute, the New England Legal Foundation, and a group of administrative law professors also submitted briefs supporting Wachovia.
