Will the courts become the new battleground for Dodd-Frank?

News Brief

By Cydney Posner

Following is a link to an article in the WSJ observing that the defeat of proxy access in the courts a week ago may make the courts a new battleground for Dodd-Frank, especially if legislative efforts to repeal provisions fail. http://online.wsj.com/article/SB10001424053111904772304576470313933175814.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsThird

According to the article, some business groups have been spurred by the appeals court ruling to  consider filing lawsuits aimed at blocking implementation of parts of Dodd-Frank. One of the possible targets is the new whistleblower rule just adopted by the SEC. You might recall  that Commissioner Casey, one of the two Republican commissioners who voted against the rule, argued, among other things, that the SEC's cost-benefit analysis was inadequate because it took into account only that portion of the rule that was discretionary to the SEC.  For example, she said that defense costs for companies would increase significantly in light of higher frequency of SEC involvement, but there was no effort in the SEC's analysis to quantify those costs. (See my email of 5/25/11.) The inadequacy of the SEC's cost-benefit analysis was also at the core of the appeals court decision on proxy access, and that decision could provide "a potential road map for other challenges." The article reports that, as of now, the Chamber of Commerce has made no decision on challenging the whistleblower rule in court. 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, such as the Futures Industry Association, may also consider legal challenges to Dodd-Frank. According to the article, that group, a trade group for futures, options and derivatives firms, warned the CFTC that rules aimed at reining in speculative trading in commodities "'may be legally infirm and, therefore, subject to judicial challenge.'" The group has also criticized as   "extremely vague and vulnerable to constitutional challenge" a Dodd-Frank provision banning some trading practices in commodities and other derivatives. The article notes that "even unsuccessful legal challenges could bog down for months or longer rules being written as part of the financial-overhaul law." Commentators quoted in the article had opposing views, one contending that the SEC is likely to have difficulty getting "a large number of complex, economically sophisticated, highly interrelated rules…past judicial scrutiny on the first try" and the other suggesting that "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."

As more rules are issued, the number of challenges is likely to climb, the article observes. Some Republican lawmakers viewed the appeals court decision as a caution "that regulators need to tread more carefully when writing regulations triggered by the Dodd-Frank law, including by incorporating concerns raised by companies."

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Cydney Posner Special Counsel, San Francisco
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