WASHINGTON — 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.
The Gramm-Leach-Bliley Act of 1999 set federal standards governing financial privacy, but explicitly let states go further. In the decade since, only three states have used that power, and despite dire predictions that even one state law could wreak havoc, banks' operations have not been impaired.
State regulatory advocates are seizing on the example to argue Congress should not weaken legislation that would create a new consumer protection agency that would let states craft tougher consumer protection laws.
"It just hasn't borne out to be true that the states have gone wild with authority where we have it," said John Ryan, executive vice president of the Conference of State Bank Supervisors. "We, too, care about balancing efficient commerce and consumer protection."
The issue could be critical as the House Financial Services Committee continues to debate the bill, which it is expected to vote on this week. Preemption has emerged as a flashpoint in the debate, with bankers arguing that if states were allowed to write and enforce their own laws, it would be hard for banks to conduct business nationwide.
While defenders of preemption acknowledge that the privacy issue did not turn into the disaster many predicted, they said the new legislation would open up many more areas of potential harm. Under the bill, states could write rules governing any financial product — not just on privacy matters.
"I don't know that you can take much from that one example," said Julie Williams, senior deputy comptroller for the Office of the Comptroller of the Currency. "The Gramm-Leach-Bliley area is a very narrow example. In CFPA, the scope they can act on is virtually unlimited."
Under Gramm-Leach-Bliley, banks must give customers an opportunity to opt out of personal information sharing between the institution and third parties. But the law set a floor not a ceiling, and under a compromise crafted by Democrats, let states write stricter laws that could be enforced against state as well as national banks.
At the time, banking industry representatives warned that states could write conflicting standards, and that if a large state, such as California, enacted its own privacy standard, all banks might have to follow suit to save on compliance costs.
Industry lobbyists fiercely lobbied against a bill promoted by California Sen. Jackie Speier (who has since been elected to Congress, and now serves on the Financial Services Committee) that would force banks to get their customers' permission before sharing their financial information with third parties. Similar to arguments in the current debate, they claimed the California standard would effectively apply nationwide, and increase compliance costs at institutions operating across states.
But after California enacted its law in 2003, it did not spark a new nationwide standard. Generally speaking, institutions appear to have weathered the new law — and similar ones passed in Montana and Vermont — without a hitch.
New York Banking Superintendent Richard Neiman said if federal authorities craft strong enough standards, the vast majority of states will accept it.
"They believed that the federal protections provided sufficient protections and there was not a need to go further," he said, referring to the 47 states that simply accepted the Gramm-Leach-Bliley standard. "We all understand the potential complications of multiple laws. I don't think states are inclined to go further."
Gil Schwartz, a partner at Schwartz & Ballen LLP who opposes the current effort to eliminate preemption, acknowledged the Gramm-Leach-Bliley standard was well constructed.
"It's a tribute to the people who drafted Gramm-Leach-Bliley" that they created "a standard the states thought appropriate," he said. "I think the reason why the states have not gone further is they felt it struck the right balance of consumer protection and the need to provide information for marketing purposes."
But other industry representatives said the privacy issue is too narrow to serve as a good example. Ron Glancz, a partner at Venable LLP, argued states will have more leeway — and inclination — to write new laws on consumer protection in light of the financial crisis.
"Consumer protection issues are No. 1 on everyone's mind now, and states and attorneys general are going to get very aggressive and we've already seen that," Glancz said. "Because it is such a hot political issue and is on everyone's mind, unlike privacy, I think at this point you would have chaos."
Richard Hunt, president of the Consumer Bankers Association, agreed.
"Anytime you see a downturn in the economy they are more apt to regulate and enforce than in a good economy," he said. "What we've just witnessed the last two years will have a long-term effect on states, banks and regulators at the state and federal level."
But Art Wilmarth, a law professor at George Washington Law School, said that even when states do go further, they do not go off in different directions. Instead, as in the case with privacy, the laws end up being largely similar.
"Even if 50 states acted, I think it would be entirely unrealistic to say 50 states would react with 50 different laws," Wilmarth said.
"Differences, even if they are small differences, can have significant implementation challenges and costs," Williams said. "The important part is the non uniformity and the cost and inefficiencies associated with non uniformity."
L. Richard Fischer, a partner with the law firm Morrison & Foerster, agreed. "It's one thing to say something is similar because the approach is similar; it's another thing to have to advise clients from a compliance perspective because in that context every word is meaningful," he said.
Ryan dismissed the claims as scare tactics similar to the lobbying effort around the passage of Gramm-Leach-Bliley.
"It seems that the motivation for preemption is not to eliminate a 'patchwork quilt,' but rather to consolidate all decision-making in Washington, where it sometimes takes 20 years to get anything done," he said. "If you don't want anything to happen, it's a pretty good place to go. The problem with that strategy is that when something does happen, it changes the world."