The Supreme Court on Monday struck down an important part of a federal regulation barring state agencies and officials from bringing enforcement actions against federally chartered national banks. In a 5–4 decision by Justice Antonin Scalia, the Court declared that the "visitorial powers" rule (12 CFR. § 7.4000) issued by the Office of the Comptroller of the Currency ("OCC") improperly limited states' rights to enforce their laws in court, and was not a "reasonable" interpretation of the National Bank Act ("NBA"). The decision, Cuomo v. The Clearing House Association, opens the door to future lawsuits by state regulators seeking to enforce state law against national banks, and may put national banks in the unenviable position of having to serve numerous regulatory "masters"—the OCC and a multitude of state agencies and officials with the power to bring enforcement actions in state court.
New York Attorney General Clashes with the OCC and National Banks
Cuomo arose when New York Attorney General Eliot L. Spitzer issued an informal request "in lieu of a subpoena" to several national banks, asking that the banks disclose non-public information about their lending practices. Spitzer sought the non-public information to supplement public information about lending statistics that banks are required to file under the Home Mortgage Disclosure Act (12 U.S.C. § 2801, et seq.). The request was part of an investigation by the attorney general's office into whether banks were violating New York fair lending laws prohibiting discriminatory lending practices. (Spitzer's successor, Andrew M. Cuomo, has continued to press for the information.)
The banks objected, arguing that only the OCC had authority to demand such information. Clearing House Association LLC, a banking trade group, and the OCC brought suit in federal court, seeking an injunction against the New York attorney general, based on the preemptive effect of the National Bank Act and the OCC's "visitorial powers" rule.
The NBA and the OCC's Expansive 'Visitorial Powers' Rule
The NBA vests the OCC with the exclusive right to conduct "visitations" on national banks, and provides that "no national bank shall be subject to any visitorial powers except as authorized by federal law" or as vested in the "courts of justice." 12 U.S.C. §484(a). The statute traditionally has been understood to bar state regulators from conducting examinations and inspecting the books and records of national banks. In its visitorial powers rule, the OCC construed the statute to prohibit not only state administrative examinations and book-and-record inspections, but also other kinds of state "enforcement actions" against national banks. See 12 CFR § 7.4000(a).
The District Court and the Second Circuit Uphold the OCC's 'Visitorial Powers' Rule, and Enjoin the New York Attorney General's Attempt to Obtain Information from the Banks
In Cuomo, the OCC and the Clearing House Association argued that the New York attorney general's informal request "in lieu of subpoena" was an improper attempt to prosecute an enforcement action in violation of the OCC's exclusive visitorial powers. The district court agreed and granted the request for an injunction. The Second Circuit affirmed and held that although "the precise scope of 'visitorial powers' is not entirely clear from the text of §484(a)," the OCC's interpretation was consistent with the Congressional intent to "shield national banks from unduly burdensome and duplicative state regulation," and therefore was "not arbitrary or otherwise not in accordance with law."
The U.S. Supreme Court Rejects the OCC's Broad Interpretation of 'Visitorial Powers'
The Supreme Court overruled the Second Circuit in part. The Court recognized that the term "visitorial powers" was ambiguous. However, it declined to defer to the OCC's expansive construction of the statute under Chevron v. N.R.D.C., 467 U.S. 837 (1984), noting that "[t]he presence of some uncertainty" did not give the OCC unfettered discretion to construe the statute expansively. "[C]ases have always understood 'visitation' as [the limited] right to oversee corporate affairs, quite separate from the power to enforce the law." The Court concluded that "the unmistakable and utterly consistent teaching of our jurisprudence, both before and after enactment of the National Bank Act, is that a sovereign's 'visitorial powers' and its power to enforce the law are two different things," and "the National Bank Act pre-empts only the former."
The Court also noted that national banks are required to comply with substantive requirements of state law that are not preempted by the NBA, and that the NBA itself recognizes that federal and state "courts of justice" have the power to adjudicate claims involving national banks. The Court reasoned that both points supported a narrow construction of visitorial powers as being separate from the state's sovereign power to enforce state law through judicial proceedings. "Channeling state attorneys general into judicial law-enforcement proceedings (rather than allowing them to exercise 'visitorial' oversight) would preserve a regime of exclusive administrative oversight by the Comptroller while honoring...Congress's decision not to pre-empt substantive state law."
The Court described its narrow construction of visitorial powers as easy to apply and pragmatic: "If a State chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant"; in other words, the targets of the action would be protected by the rules of procedure and discovery.
The Court Narrows the Scope of 'Visitorial Powers,' but Upholds the Injunction in Part
Applying its reasoning to the case at hand, the Court held that the New York attorney general's threat to issue an "executive" subpoena if his request for information was not voluntarily honored, was an improper "visitation" and not an exercise of the law enforcement power "vested in the courts of justice," which the NBA allows. The Court's analysis turned on the fact that the attorney general was threatening to exercise a general administrative subpoena power under New York law, not file an enforcement action in state court or obtain a judicial search warrant. Accordingly, the Court affirmed the injunction as applied to the threatened issuance of "executive" subpoenas, but it vacated the injunction insofar as it prohibited the attorney general from filing judicial enforcement actions.
Four Justices Dissent, Arguing that the OCC's Rule Deserved Deference
Justice Thomas issued a partial dissent, joined by Chief Justice Roberts, Justice Kennedy, and Justice Alito. The dissent agreed that "visitorial powers" was an ambiguous term, but argued that the OCC was not unreasonable when it construed the term to encompass state enforcement actions, and that deference was due to the OCC's rule under Chevron. Accordingly, the dissenters would have upheld both the OCC's expansive reading of visitorial powers and the injunction in their entirety.
The Impact of the Supreme Court's Ruling
Cuomo is an unusual decision, and many in the banking industry are likely to find it to be an unwelcome surprise. Over several decades, the Court consistently has construed the preemptive effect of the NBA broadly, and deferred to OCC regulations construing the NBA. Most recently, in 2007 in Watters v. Wachovia Bank, N.A., the Court held that the NBA and the OCC's visitorial powers rule barred state regulators from exercising administrative authority over the subsidiaries of a national bank. Cuomo did not disturb the Watters' holding concerning national bank subsidiaries, but it does make clear that the definition of visitorial powers and the preemptive reach of the NBA have limits, specifically as applied to state efforts to bring actions against national banks in court.
Looking ahead, Cuomo has several implications for national banks:
First, the good news: Cuomo confirms that state banking commissions and other state agencies do not have authority to conduct routine administrative examinations and inspections of national banks and their direct subsidiaries. The Court expressly approved the parts of the OCC's visitorial powers rule prohibiting states from conducting such "supervisory" administrative actions. Only the OCC should be able to conduct such classic "visitations" of national banks.
Second, the bad news: Cuomo opens the door to lawsuits brought by state attorneys general seeking to enforce state fair lending laws against national banks and their operating subsidiaries. Other state officials also may argue in future cases that Cuomo's reasoning applies to their efforts to bring enforcement actions in court against national banks for violations of other substantive state laws.
Third, although Cuomo suggested that the distinction between visitation and law enforcement is clear and easy to apply, there is likely to be further controversy and litigation about the scope of the visitorial powers rule. For example, controversy could arise if state attorneys general and other regulators who have authority to bring an enforcement action in state court seek to leverage that authority to conduct a pre-litigation investigation into the operations of national banks, or to file suit as a means of conducting a fishing expedition against national banks.
Fourth, Cuomo could have an impact on proposed legislation. The Obama administration's recent Financial Regulatory Reform proposal provides that the states can adopt consumer protection and fair lending standards that are stricter than federal law, and mandates that "federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions." The proposal also provides that states should be able to enforce these laws, as well as regulations of the Consumer Financial Protection Agency, with respect to federally chartered institutions, "subject to appropriate arrangements with prudential supervisors." The combination of Cuomo and the proposed legislation suggest that national banks with interstate operations and a multi-state client base may well become subject to a multiplicity of state fair lending and consumer protection laws, actions by state attorneys general or local officials, and litigation in a number of states. Cuomo also may complicate other legislative proposals designed to reform the government institutions that regulate the banking industry.
Finally, Cuomo and proposed legislation reforming regulation of the banking industry may force the OCC to clarify or reconsider other parts of its visitorial powers rule. While the NBA continues to have powerful preemptive force in many areas, Cuomo shows that a number of justices are prepared to put limits on OCC interpretative regulations that seem too expansive.