Wall St prepares Volcker rule legal challenges

Wall Street is preparing possible legal challenges to the Volcker rule due to be adopted on Tuesday, as some of the largest banks consider contributing to a fund to bring industry action against the controversial measure.

One law firm, Gibson Dunn, is assessing a lawsuit in what could be one of several disputes against the long-awaited measure, according to people familiar with the matter.

Some of the major banks affected by the rule – which bans banks from making bets on their own account, known as proprietary trading – may contribute to a lawsuit which would likely be brought by an industry trade group, those people said.

If a legal challenge is pursued, it will probably be led by Eugene Scalia, a Gibson Dunn partner and son of US Supreme Court Justice Antonin Scalia. Mr Scalia of Gibson Dunn has successfully sued regulatory agencies in the past.

The threats of lawsuits reflect the extreme industry unease over the measure, which could not only affect the activity of foreign lenders operating in the US but also moves they make anywhere overseas. The far-reaching potential of the new rule meant that even regulators expected it could face legal challenges, people familiar with the matter said

The agencies involved in Tuesday’s final vote are the Federal Reserve, the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency, all bank regulators, plus the SEC and the Commodity Futures Trading Commission. Those involved in drafting the rule have been more sensitive about Volcker than any other part of the Dodd-Frank legislation.

Banks fear the Volcker rule could curb legitimate activities, such as market making and hedging. As a result, the measure has been the most challenging to write for the five agencies, which took almost four years to finalise the rule after President Barack Obama first endorsed it in 2010.

Mr Scalia has represented the US Chamber of Commerce, the Securities Industry and Financial Markets Association (Sifma) and other Wall Street groups challenging the regulatory agencies. The chamber has called for a rethink of the Volcker rule, while Sifma has expressed concerns over how the measure could reduce liquidity.

Regulators could be questioned over how well they followed the federal Administrative Procedure Act, which lays out the way regulations should be created, and other statutes that require officials to conduct a comprehensive cost versus benefit analysis of a rule, including the economic impact.

Republican commissioners on the SEC and the Commodity Futures Trading Commission have said the Volcker rulemaking process has been deeply flawed, partly because, they say, it has been too opaque. Banks have also complained that while there has been dialogue with government officials on past regulatory measures, they have been kept in the dark when it comes to the Volcker rule.

Mr Scalia is using the Administrative Procedure Act in a current lawsuit representing Sifma and the International Swaps and Derivatives Association, which are suing the CFTC for the agency’s cross border derivatives rules, another Dodd-Frank mandate.

The lawsuit argues that the CFTC is “unlawfully circumventing” procedures, failed to conduct legally required cost-benefit analysis and imposed rules that are contrary to international co-operation.

Mr Scalia also represented Sifma and Isda in a successful lawsuit questioning the legality of a CFTC rule aimed at curbing speculation by traders in certain commodities. A US judge threw out the first rule in September 2012, saying the agency had not shown why it was necessary.

In November, the CFTC decided to drop its appeal of the judge’s decision. Instead, the agency proposed a new version of the so-called ‘position limits’ rule that clamps down on speculation by traders in a group of 28 commodities, ranging from oil to frozen concentrated orange juice.

In 2011, Mr Scalia won a lawsuit challenging the SEC’s proxy access rule that would have made it easier for shareholders to elect directors to a company’s board.