WASHINGTON -- An unexpected decision by the Supreme Court to define the extent of banking regulators' preemption powers has reawakened a legal and public policy debate that national banks had hoped was settled.
The high court has repeatedly said the National Bank Act gives the Office of the Comptroller of the Currency the power to preempt state laws seeking to limit banking powers, and federal courts have consistently upheld the legality of the agency's January 2004 regulations that generally extend the safe harbor to national banks' operating subsidiaries.
On Monday the Supreme Court granted an appeal by Linda M. Watters, the commissioner of the Michigan Office of Insurance and Financial Services, of a decision by the U.S. Court of Appeals for the Sixth Circuit. That decision gave Wachovia Corp. the right to conduct business in the state through a national bank operating subsidiary that was not beholden to state laws and regulators.
The high court had tipped its interest in December when it asked Solicitor General Paul D. Clement to brief it on the case. Last month he told the court that he sided with the OCC.
Two other appellate court decisions gave the OCC wide leeway in interpreting the National Bank Act to include operating subsidiaries. The unusual step of accepting a case in which circuit courts have found common ground has raised the question of whether the Supreme Court intends to lend its imprimatur to existing jurisprudence or overturn lower-court rulings.
The preemption debate tends to reveal bankers, regulators, and lawyers at their most passionate, and it remains as difficult as ever to distinguish between what those with a vested interest in the matter hope will happen and what they think will happen. The high court's unpredictability has left both sides with plenty of room to make their case.
"If they simply wanted the law to stand the way it has developed in the courts ... they didn't have" to hear the case, said Charles Turnbaugh, Maryland's commissioner of financial regulation. "I think it is a signal of the desire of the Supreme Court to look at these issues very carefully with a view toward possibly overturning the cases."
Mr. Turnbaugh has sued a National City Corp. subsidiary in a similar case that has been appealed to the Court of Appeals for the Fourth Circuit.
Bankers are inclined to see a different reason for the Supreme Court's decision to hear the case, despite the unanimity at the lower-court level -- which has not discouraged state regulators from suing to regulate and enforce banks and their subsidiaries.
"Even though there is no split, there is a systemic reason to get this settled; three circuits have already had to address this, which is unusual," said a banking lawyer familiar with the cases. "This is an important issue for the national bank system, and it needs to be clarified."
The OCC has chalked up a string of legal victories by relying on a theory -- articulated in the Supreme Court's 1984 ruling in Chevron USA v. Natural Resources Defense Council -- that gives federal agencies wide latitude in interpreting their implementing statutes.
Preemption foes have mounted compelling cases about the wrongheadedness of the policy behind the OCC's interpretations, but they have struggled to define the interpretations as unreasonable from a legal standpoint.
The appeal brought by Ms. Watters -- like Connecticut Banking …