Senate Approves Amendment to Financial Reform Bill Granting State Attorneys Authority to Enforce Federal Rules

By a vote of 80-18, the Senate has approved a compromise amendment to the sweeping financial reform bill (S. 3217, “Restoring American Financial Stability Act of 2010:) that allows state attorneys general to enforce federal rules, specifically those regulations developed by the proposed Consumer Financial Protection Bureau.

The amendment preserves the federal pre-emption standard in the Supreme Court’s ruling in the 1996 Barnett Bank case., according to the amendment’s sponsor by Sen. Thomas Carper, D-Del.

While the Wall Street Reform bill refers to the Supreme Court’s ruling in the Barnett Bank case, the addition of the “federal substantive standard” provision went beyond the ruling in that case by adding new statutory hurdles to applying the Barnett preemption standard.

Senate Banking Committee Chairman Christopher Dodd (D-CT) agreed to remove this new standard and to simply restore the OCC preemption standard to Barnett. The unintended consequence of keeping this additional requirement of a “federal substantive standard” would be that this could lead to uncertainty and litigation and most importantly, could hurt consumers, small business and local economies that depend upon reasonably priced financial products, Sen. Carper explained.

The amendment as modified will ensure that preemption determinations are made according to a uniform standard that will provide certainty to everyone – those that offer consumers financial products and to consumer themselves.

The amendment codifies the Supreme Court’s ruling in the Cuomo vs. Clearinghouse case by clearly stating the role State AGs may play in enforcing certain laws against national banks, Sen. Carper explained.

The amendment preserves the ability of state attorneys general to provide a backstop to the new consumer protection bureau. While the new Consumer Financial Protection Bureau will be the main enforcer of its new rules, the amendment as modified will preserve a role for State AGs to ensure that consumers are never again put at risk because federal regulators are asleep at the switch.

Under this amendment, State AGs will be able to enforce the new rules that are issued by the new Consumer Financial Protection Bureau. However, State AGs may not bring Federal class action-like suits against national banks and will not be able to go into another state to bring charges against a national bank. For example, under the modified amendment, the Attorney General in California will not be able to bring claims under the new bureau’s rules in Nevada.

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