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Supreme Court: States Can Apply Some Laws to National Banks

In a decision that will have a broad and far-reaching effect on how financial services are regulated, the United States Supreme Court ruled 5-4 on...
July 1, 2009

In a decision that will have a broad and far-reaching effect on how financial services are regulated, the United States Supreme Court ruled 5-4 on Monday June 29 that states can apply some of their own laws to big national banks operating within their borders.

The high court ruled that a state attorney general cannot directly issue a subpoena against a bank that has branches in that state and others. However, the court made clear that national banks are subject to some state laws under the National Banking Act, and therefore, an attorney general can go to court to enforce those laws upon the bank entity. Officials say the 5-4 decision opens the door for states to do their own investigations of national banks, as long as they can convince a judge that investigations are needed.

In Cuomo v. The Clearing House Association, the state of New York had asked the Supreme Court to overturn a federal appeals court decision that blocks states from investigating the lending practices of national banks with branches within its borders. It was supported by the other 49 states. The Clearing House Association, which represents the banks, said the attorney general was interfering with the federal government's supervisory powers.

"What this decision today says is that states have the ability to enforce their own laws (against national banks) as long as they follow state due process procedures, which generally mean issuance of a subpoena which can be challenged in court," said lawyer John Cooney, a former assistant solicitor general and deputy general counsel at the Office of Management and Budget.

Justice Antonin Scalia wrote the majority opinion. Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Anthony Kennedy dissented in part, saying they would have ruled with the New York- 2nd U.S. Circuit Court of Appeals which said that the responsibility for such investigations rests with the Office of the Comptroller of the Currency (OCC), a part of the Treasury Department, and other federal agencies. Comptroller of the Currency John C. Dugan said he was disappointed by the Supreme Court's ruling and the American Bankers Association (ABA) also expressed its disappointment.

What It Means to Agents:  This decision affirms that the states have the authority to regulate some activities conducted by national banks that do business within state borders. It turns aside the argument made by banks and the OCC (formerly in 2004) that state laws regarding consumer protections and market practices could not be applied, even if specific to the business of banking, to otherwise federally regulated banks and their operating subsidiaries.

For many years, the OCC had issued preemptions of state laws as applied to banks, principally state insurance consumer protection laws. While this decision does not automatically strike down these preemptions, it has the practical effect of placing limits on them because it recognizes that the states have the right to regulate national banks' activities (including their insurance activities), subject to judicial review. This decision is a victory for the principle of state-based insurance regulation.

Court: State Can Apply Some Laws to National Banks (Associated Press 6/29/09)