The Treasury Department vs. Fair Access Laws (Pt. 3)

What is Treasury’s strongest argument for being able to preempt state fair-access laws? Probably how they are to be enforced.

Source

I did a couple of quick reaction pieces on the efforts by Treasury and the OCC to push back on state fair-access laws like those recently passed in Tennessee (including amendments) and Florida. In those pieces I expressed skepticism about the strength of the arguments against the substance of the laws. However, I would be remiss if I didn’t acknowledge what are likely the strongest arguments for federal preemption of the state laws: how the Florida law is framed and how the laws are supposed to be enforced. That said, I still think it is far from a slam dunk that the laws would be preempted, at least completely.

As a refresher, both the Florida and Tennessee laws contain four general components that work together. The first component is a prohibition on banks deciding to refuse services or cut ties with a customer if the decision is made on a basis other than “quantitative, impartial, and risk-based” criteria. This requirement likely means that the bank must be able to identify specific and articulable risks related to that customer, rather than a per se prohibition on a category of customers or a whim.

The second component is removing specific criteria from the banks’ decision-making process. These include things like being involved in fossil fuels, the religious activities of the customer, the customer’s political advocacy, etc. This component operates like traditional anti-discrimination law in that it does not mandate a bank serve a customer, but it prevents a bank from considering certain protected classes when making that decision.

The third component is a reporting requirement. Both the Florida and Tennessee (as amended) laws require a bank to provide a report or response to a complaint, either to the customer in the case of Tennessee or the state financial regulator in the case of Florida. The report is supposed to explain why the bank made the decision it made. As discussed below, this requirement is likely the most vulnerable to a preemption argument.

Finally, both laws contain an additional provision that makes it an unfair trade practice under the preexisting relevant state law for banks to deny service based on prohibited methodologies and characteristics in addition to any relief found in the new laws. Those claims would be enforced by the State’s attorney general and in the case of Tennessee by the aggrieved customer.

These laws have been criticized by the Treasury and others as running contrary to the obligations of federal law. It is this argument that I have expressed the most skepticism about. It is not clear that these requirements are inconsistent with federal obligations under the Bank Secrecy Act or general principles of safety and soundness.

However, there are other potential threats to these laws. First, as Acting Comptroller Hsu said in his speech, regulating the safety and soundness of national banks is the exclusive preserve of the OCC. The second is that the reporting requirements of the laws if applied to national banks may conflict with federal law because it could arguably reflect the state exercising “visitorial power” (oversight or interference by administrators as opposed to an enforcement case in court) over a national bank or require banks to share information that they are prohibited from sharing.

Safety and Soundness

The Florida law is framed as a law prohibiting unsafe and unsound practices for banks. This quite reasonably is raising red flags for federal regulators because state law cannot intrude on the safety and soundness regulation of national banks. I’m not sure why Florida framed the law this way, but it certainly raises questions.  

However, when one looks at how the Florida law operates it doesn’t look like a safety and soundness law. It is clearly focused on protecting discrete customers from specific prohibited acts of the bank, rather than the general health and stability of the bank. The Florida regulator is also not authorized to supervise the banks on an ongoing basis to protect safety and soundness.

While the law does say that failing to comply with the law is a violation of the financial institutions code and subject to the penalties therein, it doesn’t appear that the Florida financial institutions code allows for the state regulator to penalize national banks for violations in the first place. If not, there is no way for the Florida financial regulator to try to bring an enforcement action for a safety and soundness action against a national bank under the new law.

Instead, as discussed below, the enforcement mechanism against national banks would fall on the State AG bringing a claim under Florida’s unfair trade practices law. The Florida fair-access law gives the AG exclusive authority to bring such claims via suit.

As such, characterizing the Florida law as an attempt to regulate safety and soundness as opposed to consumer protection would appear to be putting form over substance. The Tennessee law is similar except it does not adopt an unsafe and unsound framing. Rather, it is a pure consumer protection focused statute.

Reports

As mentioned above, both laws require banks, under certain circumstances, to provide reports explaining their decisions to debank a customer. This reporting requirement has been criticized as both an effort of states to exercise visitorial powers over national banks and a possible violation of the Bank Secrecy Act. There is some potential force to these critiques, but there are also arguments to the contrary.

Under federal law states are generally not allowed to exercise visitorial powers over a bank. In Cuomo v. Clearing House Assoc. the Supreme Court distinguished visitorial powers from law enforcement powers, with the former being those akin to administrative oversight, whereas the latter involved bringing an action in court to enforce a law. While the Court struck down an OCC regulation that Court said swept too broadly, it also upheld an injunction against the New York AG using executive subpoenas as opposed to judicial enforcement actions.

There is a good argument that the reporting requirements in the laws are the sort of visitational powers that are preempted by federal law. They do not involve the state seeking to enforce a law against a bank through an adversarial judicial process but rather an administrative process. It is possible the states could argue they are non-visitorial, but the law seems fairly clear.

A better argument for the states is that under the laws the reports are not required of national banks in the first place. Both laws explicitly say that if the report in question is prohibited by law the report is not required. While this exception to providing the report clearly implicates BSA, it would presumably apply to the visitorial power question as well. This may not cover every potential conflict but would reduce the potential scope of inconsistency.

Another criticism of the reports is that the reports risk revealing the existence of a suspicious activity report (SAR) under the BSA. The risk that a criminal actor might discover the existence of a SAR due to a state-law report was raised by Under Secretary Nelson in his letter. As discussed earlier, I think that there is reason to be skeptical of that risk given the provisions of Tennessee and Florida law that prohibit reports to customers that violate federal law.

Another risk, raised by the attorneys at Ballard Spahr, is that the Florida law requires the bank to provide a report to the Florida financial regulator. According to the Ballard Spar attorneys that report might share with the regulator that a SAR was filed. The Ballard Spahr attorneys note that the Florida regulator is not a law enforcement organization and therefore not permitted to receive such information.

Fair enough, but would such sharing be inevitable? It is true that federal regulations prohibit the sharing of a SAR or information that would reveal the existence of a SAR. However, that same regulation permits sharing the underlying facts, transactions, and documents that gave rise to the SAR, provided the people involved in the transaction that gave rise to the SAR are not notified.

This appears to allow banks to provide a substantive response to the state financial regulators without revealing the existence of a SAR. Further, the regulation also provides banks with a stock answer to use if they feel they are being compelled to reveal the existence of a SAR. Provided state regulators are willing to accept that answer, as they must, the actual revelation of a SAR is technically avoided.

The Florida and Tennessee laws prohibit reports that violate federal law from being provided to customers. While customers might be able to infer something in the face of silence from the state regulator, it is not at all clear that such silence would violate federal law.

Effective even with partial preemption?

Even if portions of the law are subject to preemption that doesn’t necessarily render the statutes impotent. Both laws include direct enforcement mechanisms under the states’ unfair and deceptive trade practices laws, so even if reports and administrative sanctions are not available, direct judicial enforcement is. This enforcement would be done by the State AGs (and in the case of Tennessee by the aggrieved customer). State AGs enforcing state unfair trade practices statutes in court is the type of conduct that national banks can be subject to under Cuomo. 

I don’t know whether the OCC could preempt the entire state law if only a portion conflicts with federal law, but even if it could that wouldn’t stop states from repassing laws with the offending portions removed.  

Still, it might behoove Florida and Tennessee to have their AGs or whomever is appropriate clarify the exact applicability of each provision to national banks. For example, do the state laws compel national banks to provide reports, or would they be merely voluntary? What does “quantifiable” mean? Are there regulatory sanctions available against national banks, or would enforcement have to rely on a suit brought in court?

States may also wish to consider adding a severability provision to their laws saying that if a portion of the law is preempted the rest remains in force. I’m not sure how effective that would be, but it presumably couldn’t hurt.

While not necessarily controlling, such steps could help influence both the OCC and subsequent courts if the OCC or national banks attempt to preempt the laws.  

There are reasonable arguments to be made these laws as they currently stand should be preempted, but I’m at least skeptical the arguments are a slam dunk. Of course, I’m not a judge, so I will have to wait for resolution with everyone else. Until then, we will keep an eye on it.