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IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
_______________________________________ ) AMERICAN BANKERS ASSOCIATION, ) No. 13-1310 ET AL., ) Petitioners, ) ) v. ) ) BOARD OF GOVERNORS OF THE ) FEDERAL RESERVE SYSTEM, ET AL. ) Respondents. ) _______________________________________ )
EMERGENCY MOTION OF PETITIONERS FOR STAY OF AGENCY ACTION PENDING REVIEW PUBLIC COPY—MATERIAL UNDER SEAL DELETED
Dated: December 24, 2013
Anthony Herman Christian J. Pistilli Henry Liu Andrew Soukup David M. Zionts Matthew J. Berns Sarah Tremont COVINGTON & BURLING LLP 1201 Pennsylvania Avenue, NW Washington, DC 20004-2401 (202) 662-6000 [email protected] Counsel for Petitioners
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TABLE OF CONTENTS
INTRODUCTION ....................................................................................................... 1
BACKGROUND ......................................................................................................... 2
A. The Volcker Rule ..................................................................................... 2
B. The Final Rule’s Impact on Community Banks. ......................................... 6
JURISDICTION, STANDING, AND STANDARD OF REVIEW .................................. 8
ARGUMENT ............................................................................................................ 10
I. PETITIONERS ARE LIKELY TO SUCCEED ON THE MERITS. ................... 10
A. The Agencies Exceeded Their Statutory Authority In Expansively Defining “Ownership Interest.” ............................................................... 10
B. The Final Rule’s Definition Of “Ownership Interest” Is Not A “Logical Outgrowth” Of The Proposed Rule. ........................................... 12
C. The Final Rule Is Arbitrary And Capricious Because It Ignores And Misstates The Impact On Community Banks ........................................... 14
II. A STAY IS NEEDED TO PREVENT IRREPARABLE HARM. ...................... 16
III. THE BALANCE OF HARMS DECISIVELY FAVORS MAINTAINING THE STATUS QUO. ....................................................................................... 18
IV. A STAY PENDING REVIEW WOULD SERVE THE PUBLIC INTEREST. ..................................................................................................... 19
CONCLUSION ......................................................................................................... 19
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INTRODUCTION
Petitioners bring this emergency motion seeking a stay of a portion of a recently-
promulgated regulation that will cause substantial, immediate, and irreparable harm to small
community banks and the customers they serve. Unless this motion is granted, hundreds of
community banks across the nation will be required to recognize an unexpected and, in
many cases, significant write-down to their capital accounts on or before December 31,
2013. These write-downs will constrict lending to individuals and small businesses in
communities throughout the nation. In some cases, this decrease in capital levels may
trigger serious regulatory consequences and intrusive and costly enforcement actions.
On December 10, 2013, five Agencies – the Board of Governors of the Federal
Reserve Board (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”),
the Office of the Comptroller of the Currency (“OCC”), the Securities and Exchange
Commission (“SEC”), and the Commodity Futures Trading Commission (“CFTC”) –
promulgated a 71-page Final Rule (Attachment A), supported by an 882-page preamble
(Attachment B) and a document entitled “Community Bank Applicability” (Attachment C),
to implement the “Volcker Rule” contained in the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank Act”), Pub. L. No. 111-203, § 619, 12 U.S.C.
§ 1851. To the shock of community banks, the Final Rule unexpectedly requires banks to
divest their holdings in a commonly held debt instrument known as a “TruPS-backed
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CDO” by July 2015 and, under Generally Accepted Accounting Principles (“GAAP”), to
take an immediate and irrevocable hit to earnings and capital as a result.
On this narrow issue, the Final Rule cannot stand. First, it is contrary to law,
impermissibly treating a debt instrument with no participation in profits and losses as a
prohibited, equity-like “ownership interest.” Second, its sweeping expansion of the term
“ownership interest” is not a logical outgrowth of the Proposed Rule and therefore violates
the Administrative Procedure Act (“APA”). And third, the Agencies’ utter disregard of the
great costs imposed on community banks was arbitrary and capricious.
Without immediate action by this Court, the consequences of these errors will be
grave. The Final Rule will impact more than 200 community banks and cause an estimated
$600 million in capital to vanish overnight. These capital losses will immediately subject
small banks to increased regulatory scrutiny, increase funding costs, and constrict lending
activities relied on by local communities.
BACKGROUND
A. The Volcker Rule
Congress enacted the “Volcker Rule” as part of the Dodd-Frank Act in response to
the financial crisis of 2008. The Act was intended to protect the financial system from the
systemic risks presented by large, “too-big-to-fail” institutions that, Congress determined,
contributed to the crisis. Like the Act itself, the Volcker Rule was intended to prevent large
financial institutions from undertaking risky investments with their own funds, exposing
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taxpayers to the possibility of future bailouts in the event of catastrophic losses. See, e.g.,
156 Cong. Rec. S5902-01 (Sen. Dodd) (“The purpose of the Volcker rule is to eliminate
excessive risk taking activities by banks.”).
One provision of the Volcker Rule provides that banks may not “acquire or retain
any equity, partnership, or other ownership interest” in a covered fund. 12 U.S.C.
§ 1851(a)(1)(B) (emphasis added).1 Under the statute, the Federal Reserve, FDIC, OCC,
SEC, and CFTC (the “Agencies”) were required to issue regulations implementing these
requirements through a “coordinating rulemaking.” Id. § 1851(b)(2).
On November 7, 2011, the Agencies issued a Notice of Proposed Rulemaking
(“NPRM”), 76 Fed. Reg. 68,846.2 Under the Proposed Rule, a prohibited “ownership
interest” in a covered fund was defined as follows: “any equity, partnership, or other similar
interest (including, without limitation, a share, equity security, warrant, option, general
partnership interest, limited partnership interest, membership interest, trust certificate, or
other similar instrument) in a covered fund, whether voting or nonvoting, or any derivative
of such interest.” NPRM, 76 Fed. Reg. at 68,950 (proposed § _.10(b)(3)(i)). The Agencies
explained that this definition “focuses on the attributes of the interest and whether it
1 The Act restricts holding an ownership interests in a “covered fund,” i.e., in “a hedge fund or a private equity fund.” 12 U.S.C. § 1851 (a)(1)(B); see also id. § 1851(h)(2) (defining these terms broadly). 2 The proposal spanned more than 500 pages and included “nearly four hundred distinctly worded ‘questions.’” Dissenting Statement of SEC Commissioner Gallagher, Attachment H (“Gallagher Dissent”).
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provides a banking entity with economic exposure to the profits and losses of the covered
fund.” NPRM, 76 Fed. Reg. at 68,897. They continued that if a “debt security” exhibits
“substantially the same characteristics as an equity or other ownership interest,” it “could”
be considered an “other similar instrument.” Id. (emphasis added).
During the notice and comment period, the Agencies received more than 18,000
comments. Preamble to Final Rule at 4. Notably, however, none of these commenters
focused on the possibility that debt instruments such as TruPS-backed CDOs might be
considered “ownership interests” – because they are not generally understood to be equity
interests or substantially similar to equity interests.
The process leading to the adoption of the Final Rule on December 10, 2013 was
chaotic at best. Commissioner Gallagher, for example, explained that the SEC was given
“less than a week to review the nearly one thousand pages of the adopting rule” and was
“under intense pressure to meet an utterly artificial, wholly political end-of-year deadline.”
Gallagher Dissent.3 At the end of this ragtag process, the Final Rule dramatically expanded
the definition of “ownership interest”:
(i) Ownership interest means any equity, partnership, or other similar interest. An “other similar interest” means an interest that:
(A) Has the right to participate in the selection or removal of a general partner, managing member, member of the board of directors or
3 See also Statement of Dissent by Commissioner Scott D. O’Malia on the Volcker Rule (Attachment L) (“The first opportunity each Commissioner had to review a partial draft of the nearly 1,000-page final rule came only three weeks prior to [the agency’s] vote.”).
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trustees, investment manager, investment adviser, or commodity trading advisor of the covered fund (excluding the rights of a creditor to exercise remedies upon the occurrence of an event of default or an acceleration event);
(B) Has the right under the terms of the interest to receive a share of the income, gains or profits of the covered fund;
(C) Has the right to receive the underlying assets of the covered fund after all other interests have been redeemed and/or paid in full (excluding the rights of a creditor to exercise remedies upon the occurrence of an event of default or an acceleration event);
(D) Has the right to receive all or a portion of excess spread (the positive difference, if any, between the aggregate interest payments received from the underlying assets of the covered fund and the aggregate interest paid to the holders of other outstanding interests);
(E) Provides under the terms of the interest that the amounts payable by the covered fund with respect to the interest could be reduced based on losses arising from the underlying assets of the covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding principal balance, or reductions in the amount of interest due and payable on the interest;
(F) Receives income on a pass-through basis from the covered fund, or has a rate of return that is determined by reference to the performance of the underlying assets of the covered fund; or
(G) Any synthetic right to have, receive, or be allocated any of the rights in paragraphs (d)(6)(i)(A) through (d)(6)(i)(F) of this section.
Final Rule at 32 (to be codified at § _.10(d)(6)(i)) (emphasis added). Thus, the Final Rule
enumerates a list of seven features connected by the disjunctive “or,” rendering each one
independently sufficient to trigger treatment as a prohibited “ownership interest.”
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B. The Final Rule’s Impact on Community Banks
The Final Rule’s expanded definition of “ownership interest” now covers a type of
debt instrument known as collateralized debt obligations backed by trust-preferred
securities, which are commonly called “TruPS-backed CDOs.”4 Many community banks
– with the concurrence of their regulators – purchased TruPS-backed CDOs because of their
favorable tax, accounting, and regulatory treatment. Abernathy Decl. ¶ 8 (Attachment D).
Unlike equity interests, community banks did not acquire TruPS-backed CDOs hoping to
profit from fluctuations in market value; they instead expected to receive a fixed income
akin to that generated by other debt instruments. Id. For this reason, community banks
concluded that these instruments did not exhibit “substantially the same characteristics” as
equity, NPRM , 76 Fed. Reg. at 68,897, and thus would not be affected by the Volcker
Rule. Abernathy Decl. ¶ 28. However, the Final Rule’s approach of treating “ownership”
status as triggered by any one of seven independent factors means that common features of
many TruPS-backed CDOs are swept into the Volcker Rule. Id. For example, the right of a
TruPS-backed CDO holder to remove the collateral manager, which had never been
considered dispositive in distinguishing debt from equity, now triggers the prohibition. Id.
4 A trust-preferred security is created when a bank issues debt to a trust created by that bank, and then sells its right to receive interest and principal payments on that to third-party investors. Abernathy Decl. ¶ 10. A TruPS-backed CDO is created when an investment bank purchases multiple trust-preferred securities, packages those securities into a single security, and issues new debt instruments based on that security to investors. Id.
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As a result, community banks face steep and imminent losses. The financial crisis
caused TruPS-backed CDOs to decline in value, but most community banks decided to
hold their investments until they recovered. Id. ¶ 15. Under GAAP, therefore, they were
not required to recognize any non-credit-related decreases in the fair market value of their
investments. Gullette Decl. ¶ 6 (Attachment E). The Final Rule, however, guarantees that
these banks cannot hold their TruPS-backed CDOs until they recover. As a result, GAAP
principles require the banks immediately to recognize the full current loss in value of a
TruPS-backed CDO at the end of their fiscal year. Id. ¶ 7. ABA estimates that more than
275 banks, including many of its members, will collectively realize $600 million in capital
losses as early as next week. Abernathy Decl. ¶ 18. Community banks will, on average,
suffer a staggering 4.2% capital loss virtually overnight. Id. ¶ 19. These capital losses have
far-reaching consequences for banks and the communities they serve. Id. ¶¶ 20-27; see also
infra Part II.
Because of the dire and unexpected consequences of the Final Rule, banks
immediately entered a dialogue with the Agencies. On December 19, however, the Federal
Reserve, FDIC, and OCC issued a document entitled an “FAQ” on TruPS-backed CDOs
(Attachment F). That document did not alleviate banks’ concerns. Abernathy Decl. ¶¶ 30-
35. The Agencies instructed banks to “evaluate” whether a TruPS CDO is an “ownership
interest,” but neither acknowledged nor disputed banks’ widespread understanding that their
securities are captured. FAQ at 3. The Regulators also suggested that funds might be able
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to be restructured so as not to be “covered.” FAQ at 1-2. However, such changes could not
be undertaken by banks unilaterally, and in the unlikely event that such restructuring were
feasible, it would be impossible to achieve by December 31. Abernathy Decl. ¶ 33.
After this round of dialogue failed, in the morning of December 23, ABA informed
the Agencies it would seek judicial relief, and requested that they stay the relevant
provisions of the Final Rule (Attachment G). Without a response and unable to delay
further, petitioners filed their petition for review and now seek emergency relief.
JURISDICTION, STANDING, AND STANDARD OF REVIEW
1. Congress directed the Agencies to implement the Volcker Rule through an
unusual “coordinated rulemaking” by five agencies, with the Federal Reserve, FDIC, and
OCC acting “jointly.” 12 U.S.C. § 1851(b)(2)(B). Since the Final Rule was promulgated
by the Federal Reserve under Chapter 17 of Title 12, this Court has exclusive jurisdiction
under 12 U.S.C. § 1848. See Inv. Co. Inst. v. Bd. of Gov. of the Fed. Reserve Sys., 551 F.2d
1270, 1278-79 (D.C. Cir. 1977) (holding that the Court of Appeals has “exclusive
jurisdiction” over applicable Federal Reserve “rulemakings”). Accord API v. SEC, 714
F.3d 1329, 1333 (D.C. Cir. 2013).5 To the extent the joint action of other agencies in
promulgating the same Rule is not within this basis of jurisdiction, this Court may exercise
5 Because community banks holding TruPS-backed CDOs typically are
not regulated by the SEC or CFTC, petitioners are challenging the Final Rule as jointly promulgated by the three banking regulators.
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ancillary jurisdiction. See Cmtys. Against Runway Expansion v. FAA, 355 F.3d 678, 683-84
(D.C. Cir. 2004).6
2. Petitioner ABA has standing to sue on behalf of its members because (1) those
members would otherwise have standing to sue in their own right; (2) the interests ABA
seeks to protect are germane to its purpose; and (3) neither the claim asserted nor the relief
requested requires the participation of individual members. See Hunt v. Wash. State Apple
Adver. Comm’n, 432 U.S. 333, 343 (1977). As the leading advocate of the nation’s banking
industry, Abernathy Decl. ¶ 3, ABA seeks to protect its members from these unintended
consequences of the Final Rule and provide relief to all of its injured members. See Warth
v. Seldin, 422 U.S. 490, 515 (1975).
3. In deciding whether to stay agency action, this Court considers four factors:
(1) likelihood of success on the merits; (2) irreparable harm; (3) substantial harm to other
parties by a stay; and (4) the public interest. Virginia Petrol. Jobbers Ass’n v. Fed. Power
Comm’n, 259 F.2d 921, 925 (D.C. Cir. 1958).7
6 Any ambiguity over where jurisdiction lies would be resolved in favor of this Court. See Cmtys. Against Runway Expansion, 355 F.3d at 684. However, because this “coordinated” and “joint” rulemaking presents unusual circumstances, petitioners have followed this Court’s counsel and are also filing in the District Court. See Nat’l Auto. Dealers Ass’n v. FTC, 670 F.3d 268, 272 (D.C. Cir. 2012). A copy of petitioners’ District Court complaint is attached (Attachment K). 7 On December 23, 2013, petitioner ABA formally requested that the Agencies stay the relevant provision of the Final Rule, see Attachment G, and the Agencies have taken no action. See Fed. R. App. P. 18. In light of the imminent harm petitioners face, additional delay before seeking relief would have been impracticable. See id. Counsel for petitioner (continued…)
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ARGUMENT
I. PETITIONERS ARE LIKELY TO SUCCEED ON THE MERITS.
A. The Agencies Exceeded Their Statutory Authority In Expansively Defining “Ownership Interest.”
The Dodd-Frank Act prohibits a “banking entity” from “acquir[ing] or retain[ing]
any equity, partnership, or other ownership interest in” a covered fund. 12 U.S.C.
§ 1851(a)(1)(B) (emphasis added). The Final Rule distorts the phrase “ownership interest”
beyond recognition. It lists seven purportedly equity-like features, and provides that an
interest with any of the seven triggers the Rule’s prohibitions. Final Rule at 32 (to be
codified at § _.10(d)(6)(i)). As a result of this stretched definition, the Final Rule sweeps in
the TruPS-backed CDOs held by many community banks. Even though these debt
instruments entitle the holder only to fixed returns without any sharing of profits (a core
defining feature of equity), they will commonly be captured by one of the Final Rule’s
seven independent tripwires, such as the right to remove the collateral manager. E.g.,
Abernathy Decl. ¶ 29. This result cannot be squared with the plain language of the statute.
The statutory phrase “other ownership interest” is not unlimited. To avoid rendering
the terms that precede it in the list – along with the word “other” – superfluous, it must be
construed as an interest that is similar to an “equity” or “partnership” interest. See Trans
Union Corp. v. FTC, 81 F.3d 228, 234 (D.C. Cir. 1996) (applying this “ejusdem generis”
notified counsel for respondents by telephone that this motion would be forthcoming. See D.C. Cir. R. 18(a)(2).
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canon to interpret a “catch-all” term as sharing the characteristics of the other items in the
list). The defining feature of such interests is risk: equity, partnership, and similar interests
allow the holder a chance of significant upside gains, while exposing it to the downside risk
of loss. Thus, applying basic principles of statutory interpretation, “ownership interest”
requires an equity-like interest in the sense of taking on risk and participation in profits and
losses.
Statutory purpose compels the same result. Congress enacted the Volcker Rule to
prevent large banks from taking large risks. See 12 U.S.C. § 1851(b)(1)(E); 156 Cong. Rec.
S5902-01 (Sen. Dodd). This purpose is further reason why “ownership interest” cannot be
given meaning wholly disconnected from the problem of banks holding risky equity
investments. Indeed, the Agencies appear to have appreciated this purpose initially, when
they proposed a rule that, at most, would have reached debt-in-name-only instruments that
shared “substantially the same characteristics” as equity. NPRM, 76 Fed. Reg. at 68,897.
Notwithstanding the statutory text, context, and purpose, the Final Rules enumerate
seven triggers, some of which bear no relationship to the features of equity with which
Congress was concerned. Under the Agencies’ view, for example, a debt interest can
qualify as “ownership” based solely on the holder’s right to participate in the removal of
managers, Final Rule at 32 (to be codified at § _.10(d)(6)(i)(A)), even though similar rights
are routinely held by creditors, Abernathy Decl. ¶ 32. Even if such an instrument, like a
TruPS-backed CDO, otherwise bears all of the traditional characteristics of debt – including
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the key characteristic of debt instruments, the expectation of fixed payments and not a share
of profits, id. ¶¶ 12-13 – the Final Rule still treats it as a purportedly equity-like “ownership
interest.” In other words, the Final Rule prohibits the holding of debt instruments that do
not expose the holder to the type of investment risk Congress actually sought to address.
In sum, by displacing Congress’s requirement of an equity-like ownership interest
with a sweeping list of independent triggers unmoored from the statute, the Agencies acted
contrary to law. The Court is therefore likely to vacate the Final Rule’s definition of “other
similar interests” as inconsistent with the governing statutory language.
B. The Final Rule’s Definition Of “Ownership Interest” Is Not A “Logical Outgrowth” Of The Proposed Rule.
Even if the Final Rule’s definition of “ownership interest” could be squared with the
statute, the definition must be set aside because the agencies adopted it without providing
interested parties the “fair notice” required by the APA. Long Island Care at Home, Ltd. v.
Coke, 551 U.S. 158, 160 (2007); 5 U.S.C. § 553(b)(3). The Agencies did not adopt the
Proposed Rule’s definition, and the Final Rule’s definition was not a “logical outgrowth” of
the proposal. See, e.g., Envtl. Integrity Project v. EPA, 425 F.3d 992, 993 (D.C. Cir. 2005).
The Proposed Rule’s definition of “ownership interest” did not expressly include
debt securities. See 76 Fed. Reg. at 68,950 (proposed § _.10(b)(3)(i)). The proposal listed
equity interests, partnership interests, shares, equity securities, warrants, options, general
partnership interests, membership interests, and trust certificates – but not debt securities –
as types of “ownership interests.” See id. At most, the Agencies suggested in the preamble
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that a debt security “could” fall within the rule’s catch-all for “other similar instruments” if
the debt security “exhibits substantially the same characteristics as an equity or other
ownership interest.” Id. at 68,897 (emphases added).
The Final Rule inexplicably abandons the limits on the Proposed Rule’s definition of
“ownership interests.” See Final Rule at 32 (to be codified at § _.10(d)(6)(i)); Preamble to
Final Rule at 605-22. Instead, the Final Rule purports to identify numerous “features” and
“characteristics” of equity interests, id. at 609, 612, including the right to participate in the
removal of management and the right to receive a share of the profits. See Final Rule at 32
(to be codified at § _.10(d)(6)(i)). The Final Rule, moreover, defines “ownership interest” to
include “any interest in or security issued by a covered fund that exhibits any of the[se]
features or characteristics,” id. at 609 (emphases added). Thus, between the Proposed and
Final Rules, the definition of “ownership interest” transformed from potentially including a
debt instrument that “exhibits substantially the same characteristics” as an equity interest,
76 Fed. Reg. at 68,897 (emphasis added), to one that sweeps in any debt security, like
TruPS-backed CDO, that has “any of the specified characteristics” of an equity interest,
Preamble to Final Rule at 611 (emphasis added).
Potentially interested parties could not have expected the Agencies to expand the
proposed definition so dramatically. Cf. Ne. Md. Waste Disposal Auth. v. EPA, 358 F.3d
936, 951-52 (D.C. Cir. 2004) (“logical outgrowth” test is satisfied only if interested parties
“should have anticipated” that the change was possible and “reasonably should have filed
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their comments on the subject”). Community banks could not have been expected to
anticipate and comment on the Final Rule’s definition of “ownership interest” because – as
the Agencies themselves acknowledge – that definition encompasses interests, like interests
in TruPS backed CDOs, that would not ordinarily be considered ownership or equity
interests. See Preamble to Final Rule at 612 (“The Agencies understand that the definition of
ownership interest in the final rule may include interests in a covered fund that might not be
considered an ownership interest or equity interest in other contexts.”). Indeed, the absence
of significant comments from community banks and their representatives on this issue of
critical importance is telling, and confirms that the Proposed Rule failed to provide adequate
notice. The Court is therefore likely to vacate the Final Rule’s definition of “ownership
interest” for failure to comply with the notice-and-comment requirements of the APA.
C. The Final Rule Is Arbitrary And Capricious Because It Ignores And Misstates The Impact On Community Banks.
The Agencies also acted arbitrarily and capriciously, because they ignored the Final
Rule’s devastating impact on small, community banks. See 5 U.S.C. § 706. Although the
Agencies set out to craft a rule that would have minimal burdens on community banks, see
Attachment C, the Final Rule’s application to TruPS-backed CDOs will have precisely the
opposite effect. An agency decision that ignores substantial economic costs and achieves
the opposite of its intended result is not reasoned. See Nat’l Ass’n of Home Builders v. EPA,
682 F.3d 1032, 1040 (D.C. Cir. 2012) (“[W]hen an agency decides to rely on a cost-benefit
analysis as part of its rulemaking, a serious flaw undermining that analysis can render the
15
rule unreasonable.”); Nat’l Telephone Co-op Ass’n v. FCC, 563 F.3d 536, 540 (D.C. Cir.
2009) (“[T]he APA together with the Regulatory Flexibility Act require that a rule’s impact
on small businesses be reasonable and reasonably explained.”); Thompson v. Clark, 741
F.2d 401, 405 (D.C. Cir. 1984) (rule may be arbitrary and capricious where agency
“underestimate[d] the harm inflicted upon small business.”).
The Regulatory Flexibility Act (“RFA”) requires the Agencies to consider whether
the rules they propose will have a significant economic impact on a substantial number of
community banks. 5 U.S.C. §§ 603-604; see Small Refiner Lead Phase-Down Task Force
v. EPA, 705 F.2d 506, 538-39 (D.C. Cir. 1983) (RFA defects inform arbitrary and
capricious analysis).8 To satisfy this requirement, the Agencies repeatedly assured
community banks that the Final Rule would not materially affect their operations:
• The Agencies asserted in the NPRM that “[t]he proposed rule would not appear to have a significant economic impact” on community banks. 76 Fed. Reg. at 68,939.
• The Agencies certified that the Final Rule “will not have a significant economic impact on a substantial number of small banking entities.” Preamble to Final Rule at 881.
• The Agencies issued a joint report on the Final Rule’s applicability to community banks. The report states that “[t]he Final Rule is designed to place minimal
8 A community bank is covered by the RFA if it, together with domestic and foreign affiliates, has $500 million or less in assets. 5 U.S.C. § 601(3); 13 C.F.R. § 121.201.
ABA estimates that at least 110 banks hold fewer than $500 million in
assets and hold TruPS-backed CDOs. Abernathy Decl. ¶ 19.
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burden on community banks given the nature of their activities.” Community Bank Applicability at 1.
Despite these assurances, the Final Rule’s last-minute expansion of the term “ownership
interest” to sweep in TruPS-backed CDOs will have an unexpected, significant, immediate
and irreversible impact on hundreds of community banks and the customers they serve. See
Part II, infra; Abernathy Decl. ¶ 19 (summarizing impact on small banks).
In sum, the Agencies acted arbitrarily and capriciously by failing to account for the
devastating economic impact of the Final Rule on small, community banks, despite their
own stated commitment to minimizing the burden on these entities. Petitioners are therefore
likely to succeed on the merits.
II. A STAY IS NEEDED TO PREVENT IRREPARABLE HARM.
The Final Rule will have a significant, irreversible financial impact on small
community banks as early as next week. Because this looming danger is “great, certain, and
imminent,” Holiday CVS, L.L.C. v. Holder, 839 F. Supp. 2d 145, 168 (D.D.C. 2012),
petitioners are entitled to a stay to protect them from non-recoverable harm. See Wisc. Gas
Co. v. F.E.R.C., 758 F.2d 669, 675 (D.C. Cir. 1985) (suggesting that “unrecoverable” harm
supports a finding of irreparable harm).
As explained above, by requiring banks to divest TruPS-backed CDOs, the Final
Rule – in conjunction with applicable accounting rules – effectively requires banks to
recognize significant and unexpected losses on these investments at the end of their fiscal
year, typically December 31. ABA estimates that 275 banks will immediately realize $600
17
million in capital losses as early as next week, and many of the nation’s smallest banks will
face (on average) a staggering 4.2 percent loss of capital. Abernathy Decl. ¶¶ 18-19.
These substantial capital losses will have a number of serious consequences. First,
the announcement that a bank’s earnings and capital levels have fallen would likely
seriously damage the reputation of a bank in its community, with its customers, and in the
markets. Abernathy Decl. ¶ 22. Among other things, the bank’s costs of acquiring funds to
make new loans would increase, as third-party lenders would charge the bank more. Id.
Depositors and potential depositors might withdraw their funds or choose not to become
customers. Id.; cf. Hamilton Bank, N.A. v. Office of Comptroller of the Currency, 227 F.
Supp. 2d 1, 14 (D.D.C. 2001) (agency action prohibiting bank from “engag[ing] in
transactions with certain individuals or entities” “will likely cause irreparable harm”).
Second, a decrease in a bank’s capital levels may place a bank in a lower capital
category, leading depositors to demand higher interest rates and the FDIC to charge higher
deposit insurance premiums. Abernathy Decl. ¶ 24.
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Third, a decrease in a bank’s capital levels may expose it to regulatory risk. Id. ¶ 25.
Fourth, a bank’s capital level directly impacts its ability to make loans. Abernathy
Decl. ¶ 27. Unless the bank was previously over-capitalized, a sudden decrease in its capital
will almost certainly require the bank immediately to decrease its lending activity.
Banks affected by the Final Rule, moreover, would have no recourse in the absence
of emergency relief. Under FASB accounting standards, once a bank realizes the loss in a
TruPS-backed CDO’s fair market value on December 31, 2013, that charge – and the
corresponding impact on a bank’s capital levels – is irreversible. Gullette ¶ 14. This is true
even if a court later vacates the relevant regulatory action. Id. Nor could the banks obtain a
monetary recovery from the Agencies for these harms. See Holiday, 839 F. Supp. 2d at 168
(“when the defendant is entitled to sovereign immunity,” “economic loss is
unrecoverable”).
III. THE BALANCE OF HARMS DECISIVELY FAVORS MAINTAINING THE STATUS QUO.
In contrast to the significant and immediate harm that hundreds of banks across the
nation will face in the absence of emergency relief, see Part II, supra, neither the Agencies
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nor anyone else would suffer any harm if petitioners’ motion were granted. The Final Rule
permits banks to continue to own their existing TruPS-backed CDOs until at least July
2015. Accordingly, a stay would preserve the status quo while these issues are litigated
without impairing the regulatory objectives of the Final Rule. This factor therefore weighs
heavily in favor of a stay. See Independent Bankers Ass’n of Am. v. Smith, 534 F.2d 921,
950-51 (D.C. Cir. 1976) (banking regulator not harmed by order maintaining status quo).
IV. A STAY PENDING REVIEW WOULD SERVE THE PUBLIC INTEREST.
The public interest would also be served by staying the Final Rule. If hundreds of
small, community banks are unexpectedly required to take significant capital losses on
December 31, they likely will be forced to immediately curtail their lending activity. This
would have a devastating impact on their prospective borrowers, including on the many
small businesses that rely on local community banks. In addition, “there is a substantial
public interest in ensuring that [an agency] acts within the limits of its authority,” Clarke v.
Office of Fed. Housing Enterprise Oversight, 355 F. Supp. 2d 56, 66 (D.D.C. 2004).
CONCLUSION
For the foregoing reasons, petitioners respectfully request that the Court stay the Final
Rule’s definition of “other similar interests” in § _.10(d)(6) of the Final Rule such that it is
void, and the status quo preserved, pending review. In light of the imminent and irreparable
harm facing Petitioners and community banks more generally if no action is taken by the
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end of the year, Petitioners further request that the Court grant an administrative stay while
deciding this motion, and expedite its consideration of this motion.
Respectfully submitted,
December 24, 2013
__s/Anthony Herman__________________ Anthony Herman Christian J. Pistilli Henry Liu Andrew Soukup David M. Zionts Matthew J. Berns Sarah Tremont COVINGTON & BURLING LLP 1201 Pennsylvania Avenue, NW Washington, DC 20004-2401 (202) 662-6000 [email protected] Counsel for Petitioners
INDEX TO ATTACHMENTS
Attachment A Final Rule, Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships with, Hedge Funds and Private Equity Funds (Dec. 10, 2013).
Attachment B (Excerpted) Preamble to the Final Rule, Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships with, Hedge Funds and Private Equity Funds (Dec. 10, 2013).
Attachment C The Volcker Rule: Community Bank Applicability (Dec. 10, 2013).
Attachment D Declaration of Wayne A. Abernathy
Attachment E Declaration of Michael Gullette
Attachment F FAQ Regarding Collateralized Debt Obligations Backed by Trust Preferred Securities under the Final Volcker Rule (Dec. 19, 2013).
Attachment G Letter from Frank A. Keating, President & CEA of the American Bankers Association to Chairman Ben Bernake, Chairman Martin Gruenberg, and Comptroller Thomas Curry, dated December 23, 2013.
Attachment H Dissenting Statement Regarding Adoption of Rule Implementing the Volcker Rule by Commissioner Daniel M. Gallagher (Dec. 10, 2013), obtained from http://www.sec.gov/News/PublicStmt/ Detail/PublicStmt/1370540477693#.Urjtg9JDuSp.
Attachment I Declaration of H. Douglas Chaffin [Portions Under Seal]
Attachment J Declaration of Frank Sibley [Portions Under Seal]
Attachment K Complaint in American Bankers Association, et al. v. Federal Deposit Insurance Corp., et al., Civ. No. _____ (D.D.C. filed December 24, 2013) [Portions Under Seal]
Attachment L Dissenting Statement Regarding Adoption of Rule Implementing the Volcker Rule by Commissioner Daniel M. Gallagher (Dec. 10, 2013), obtained from, http://www.cftc.gov/PressRoom/SpeechesTestimony/ omaliastatement12101
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IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
_______________________________________ ) AMERICAN BANKERS ASSOCIATION, ) No. 13-1310 ET AL., ) Petitioners, ) ) v. ) ) BOARD OF GOVERNORS OF THE ) FEDERAL RESERVE SYSTEM, ET AL. ) Respondents. ) _______________________________________ )
CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES
Pursuant to Cir. R. 28(a)(1), counsel for Petitioners hereby certifies as
follows:
A. Parties, Intervenors, and Amici. The parties to this Petition are
Petitioners the American Bankers Association, CB&T Bancshares, Inc., Citizens Bank &
Trust Company, Monroe Bank & Trust Company, and MBT Financial Corporation; and
Respondents the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, and the Office of the Comptroller of the Currency. There are no
intervenors or amici.
B. Rulings Under Review. Petitioners are petitioning this Court for
review of a portion of a Final Rule issued jointly by the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, and the Office of the
2
Comptroller of the Currency (collectively, “the Agencies”), entitled “Prohibitions and
Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge
Funds and Private Equity Funds.” The Agencies issued the Final Rule, a Preamble, and a
document entitled “The Volcker Rule: Community Bank Applicability” on December 10,
2013.
C. Related Cases. On December 24, 2013, Petitioners will file a lawsuit
against Respondents in the United States District Court for the District of Columbia.
Although this Court has exclusive jurisdiction because the Final Rule was promulgated by
the Federal Reserve, see 12 U.S.C. § 1848; Inv. Co. Inst. v. Bd. of Gov. of the Fed. Reserve
Sys., 551 F.2d 1270, 1278-79 (D.C. Cir. 1977), this “coordinated” and “joint” rulemaking
presents unusual circumstances. While any ambiguity over where jurisdiction lies would be
resolved in favor of this Court, see Communities Against Runway Expansion, 355 F.3d 678,
684 (D.C. Cir. 2004), in an abundance of caution, Petitioners have followed this Court’s
counsel and are also seeking relief in the District Court. See Nat’l Auto. Dealers Ass’n v.
FTC, 670 F.3d 268, 272 (D.C. Cir. 2012).
Aside from Petitioner’s forthcoming action in the District Court, to counsel’s
knowledge, no other similar case is currently pending in this Court or in any other court.
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Respectfully submitted,
December 24, 2013
s/Anthony Herman Anthony Herman Christian J. Pistilli Henry Liu Andrew Soukup David M. Zionts Matthew J. Berns Sarah Tremont COVINGTON & BURLING LLP 1201 Pennsylvania Avenue, NW Washington, DC 20004-2401 (202) 662-6000 [email protected] Counsel for Petitioners
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CERTIFICATE OF SERVICE
I hereby certify that, on this 24th day of December 2013, copies of the
foregoing Emergency Motion of Petitioners For Stay of Agency Action Pending Review
and Certificate as to Parties, Rulings, and Related Cases, were served, by agreement of the
parties, via CM/ECF and email to the listed attorneys:
s/Anthony Herman Anthony Herman
Dated: December 24, 2013
Kit Wheatley, [email protected], on behalf of The Board of Governors of the Federal Reserve System
Horace Sneed, [email protected],
on behalf of The Federal Deposit Insurance Corporation
Barbara Sarshik, [email protected],
on behalf of The Office of the Comptroller of the Currency
