Posted on 29 Jul 2011
The battle over the Dodd-Frank law is now shifting to the courts.
Some business groups are considering filing lawsuits aimed at blocking parts of the financial overhaul passed by Congress last July. While legal challenges likely won't happen unless efforts to win changes from regulators or lawmakers fail, Dodd-Frank opponents are emboldened by last week's appeals-court ruling that toppled a Securities and Exchange Commission rule designed to help investors oust corporate directors.
The Dodd-Frank law gave the SEC authority to write the rule, but the U.S. Chamber of Commerce and the Business Roundtable sued to overturn it.
David Hirschmann, president and chief executive of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said officials are concerned about a whistleblower rule issued by the SEC under the Dodd-Frank law, which was passed in the wake of the financial crisis in response to calls for more regulatory oversight.
In May, the SEC commissioners approved by a 3-2 vote a rule that includes a bounty of at least $100,000 to people who bring the agency tips about corporate wrongdoing that lead to penalties exceeding $1 million.
Kathleen Casey, one of the two Republican commissioners who voted against the rule, said she was concerned the SEC failed to properly consider the added cost to employers as the rule was being written.
She warned that the rule would encourage corporate whistleblowers to bypass internal complaint procedures and go directly to the SEC. That could increase companies' legal costs, as they have to deal with investigations by the agency.
Under federal law, the SEC is required to conduct an adequate analysis of the costs and benefits of proposed rules. The federal appeals court ruled that agency officials "inconsistently and opportunistically" skewed their cost-benefit analysis of the proxy-access rule, a potential road map for other challenges.
"Suing a regulator is an expensive and slow process. It's not something we do gleefully," Mr. Hirschmann said in an interview. "We do it because we have no other choice."
A spokesman for the SEC said a report to Congress last month by the agency's Office of Inspector General "clearly showed that cost-benefit analysis both informs our Dodd-Frank rule making and is integrated into our rule-making process." The agency still is considering its options following the court ruling, a spokesman said.
No decision has been made on challenging the whistleblower rule in court, Mr. Hirschmann said, adding that such a move would be a "last resort." The U.S. Chamber of Commerce lobbied to amend the whistleblower provision but largely failed.
The group also has pushed hard on other Dodd-Frank issues, including derivatives, the new Consumer Financial Protection Bureau and pay ratios at companies. The U.S. Chamber of Commerce's legal arm, called the National Chamber Litigation Center, has a multimillion dollar annual budget for pursuing business interests in courts.
Other business groups also may consider legal challenges. In March, the Futures Industry Association, a trade group for futures, options and derivatives firms, warned the Commodity Futures Trading Commission that rules aimed at reining in speculative trading in commodities "may be legally infirm and, therefore, subject to judicial challenge."
The rules, which aren't final, would set position limits on how much a trader could bet.
The Futures Industry Association also has denounced a Dodd-Frank provision banning some trading practices in commodities and other derivatives.
That part of the law is "extremely vague and vulnerable to constitutional challenge by market participants," the trade group said in December. Barbara Wierzynski, general counsel at the Futures Industry Association, wouldn't rule out going to court but said the group has never filed a lawsuit against the CFTC.
"Generally, our participation has been limited to providing the courts with our interpretation of the relevant law or CFTC rule," she said.
A spokesman for the CFTC declined to comment.
Even unsuccessful legal challenges could bog down for months or longer rules being written as part of the financial-overhaul law.
"What are the chances that the SEC will be able to get a large number of complex, economically sophisticated, highly interrelated rules…past judicial scrutiny on the first try?" said Joseph Grundfest, a Stanford Law School professor and former SEC Democratic commissioner. "I wouldn't bet the farm on it."
Philip Bartz, a partner at law firm Bryan Cave LLP who won court decisions against the SEC on rules that predated Dodd-Frank, said opponents likely will face an uphill legal battle because "a lot of courts are going to have deference to what the SEC needs to do to implement the main thrust" of the law.
The number of legal challenges is likely to climb as more rules are issued, some observers said. The SEC and CFTC still are working on dozens of rules related to derivatives alone.
Some Republican lawmakers said last week's appeals-court ruling shows that regulators need to tread more carefully when writing regulations triggered by the Dodd-Frank law, including by incorporating concerns raised by companies.
Last week's ruling "is just the latest in a series of SEC reprimands and confirms the need for congressional action," said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee.