Preemption Issue May Turn on Conflict in 2 Federal Laws

By Zindler, Ethan | American Banker, December 19, 2005 | Go to article overview

Preemption Issue May Turn on Conflict in 2 Federal Laws


Zindler, Ethan, American Banker


In the push for comprehensive federal data-security legislation, whether to exempt nationally chartered banks from state consumer privacy laws has been a sticking point.

Last month Democrats complained about a provision in a bill before the House Financial Services Committee that would codify the power claimed by the Office of the Comptroller of the Currency to preempt state privacy statutes.

The measure would allow national banks to operate under a handful of federal laws rather than various privacy provisions on the books in 21 states.

Longtime backers as well as foes of the OCC's efforts to assert itself as the sole regulator of national banks say the concern on the Hill could prove irrelevant. The comptroller may already have the ability to preempt state privacy protections, they say; all that is needed is the right test case to prove it in court.

Other experts say that on this particular issue, Comptroller John Dugan is unlikely to try to rack up another preemption victory, because going to bat for the banks on such a hot-button issue is a sure loser.

Ironically, the question a court might someday address could have less to do with a conflict between national and state statutes than between two federal ones adopted 135 years apart -- the National Bank Act of 1864 and the Gramm-Leach-Bliley Act of 1999.

Over the last two years the OCC has asserted that under the National Bank Act it has the sole right to enforce laws that "obstruct, impair, or condition" a national bank's operation. But GLB contains the so-called "Sarbanes provision," which explicitly grants states the right to impose tougher consumer privacy protections than those at the federal level.

"Normally a later statute will be given precedence over an earlier one, and obviously Gramm-Leach-Bliley was much later than the National Bank Act," said Arthur Wilmarth, a George Washington University Law School preemption expert who has long championed state regulators' cause.

But Mr. Wilmarth said the courts have given the OCC much leeway in interpreting the National Bank Act in recent years, including a high-profile preemption victory over New York Attorney General Eliot Spitzer on Oct. 12. Because the law was crafted with nationally chartered banks in mind, it could be deemed more relevant than GLB, he said.

Gilbert Schwartz, a partner in Schwartz & Ballen LLP who advises financial firms on compliance issues, said he also envisions a potential conflict between the two federal laws. He thinks the OCC may choose consumer privacy as the next front in the preemption war.

"It's just another area the comptroller can explore, given the powerful weapon of preemption," he said.

But former congressman John LaFalce, who was long a member of the House Financial Services Committee, said GLB clearly trumps the National Bank Act.

The idea that GLB is somehow less relevant is "absurd," said Mr. LaFalce, who was instrumental in crafting it. "If they're resting their case on something like that, it's extremely weak."

Comptroller Dugan has made no public statements on whether national banks deserve an across-the-board exemption from state privacy laws. …

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