WASHINGTON — Did the Treasury Department act inappropriately when it sent a highly publicized — and very critical — comment letter to its own bureau objecting to a pending proposal?

That's the question that was sparked in policy circles this week after the Obama administration blasted the Office of the Comptroller of the Currency's preemption plan, arguing it violated the intent of the Dodd-Frank Act.

Critics, primarily supporters of federal preemption, said it was unprecedented for Treasury to publicly chastise its own bureau, and violated the spirit — if not exactly the letter — of a law forbidding the administration from delaying or derailing a rulemaking. It also may provide momentum for judicial challenges to the OCC, and establish a litmus test for future comptroller nominees.

"You can say that the OCC put the rule out there for comment and the Treasury can comment on it just like anybody else can," said Bob Clarke, a former comptroller and a senior partner with Bracewell & Giuliani LLP. "But I do think that there is an appropriateness issue and an independence issue that needs to be thought about. It might have been better for Treasury if they had a concern about it to have simply talked with the OCC rather than putting out a public comment letter, which has every ability to be misconstrued as the Treasury trying to fire a shot at the OCC."

While agencies do sometimes comment on the proposals of other regulators — such as the OCC weighing in on the Federal Reserve Board's interchange plan — industry watchers said they had never heard of Treasury submitting a comment letter. While the OCC is nominally under the Treasury Department, it is an independent agency with a leader appointed by the president and confirmed by the Senate.

Under the law, the Treasury secretary "may not delay or prevent the issuance of any rule or the promulgation of any regulation by the Comptroller of the Currency."

Still, the OCC has often coordinated with Treasury ahead of time to ensure both sides are on the same page, former agency staffers said.

"Ordinarily what you'd see are conversations, informal conversations and consultation," said Donald Lamson, a former OCC official and a partner with Shearman & Sterling LLP. "This letter … tells me that there were fewer consultations than would be optimal. Or if there were consultations, they weren't very fruitful from the Treasury's perspective, so they're coming forward and actually going public with this."

Both the Treasury and OCC declined to comment on the letter, but some observers said it was better that the administration made its feelings public, rather than trying to influence the OCC in private.

"What would have been inappropriate is to weigh in behind the scenes and try to order the OCC to do something, or say it should do something," said John Dugan, a former comptroller and partner at Covington & Burling LLP. "As long as it's part of the public record, and it's clear that the OCC has the discretion to do what it's going to do, then I think it's appropriate."

What is unclear is how big an impact the letter may have on the agency. Dugan, who left the OCC last August, said he thought staffers there would consider the comment carefully, but not give it special deference.

"I think they have to take the comment into account as they would any other comment," he said. "But beyond that I think they are quite — and appropriately so — jealous of their independence, and they would treat it no different than any other comment."

While nothing in the law expressly prevents Treasury from submitting a comment, disagreements on proposals are usually hashed out behind the scenes, Clarke and Dugan said.

When Dugan headed the OCC, he said Treasury never interfered with policy issues. Although the OCC often briefed them on where a regulation or proposal was headed, "it was accepted that statutory interpretations were entirely in the purview of the agency," he said.

Clarke, who headed the agency from 1985 to 1992, agreed, saying the administration and Treasury have historically taken a hands-off approach when it comes to the banking regulators.

"There were disagreements," Clarke said, "but it was never done in a public way. It was always … somebody over at Treasury wanted to talk to me about what we were doing in a particular supervision area, or they might ask me to come over and visit with them, but there were never any public shots like this taken."

Discussing these issues publicly could create the perception that Treasury is trying to undermine the OCC's independence, he said.

Michael Barr, a professor at the University of Michigan and a former Treasury assistant secretary in the current administration, said Treasury submitting a comment letter is not unprecedented. Barr said he helped draft a comment letter during the Clinton Administration urging the Federal Reserve to change its rule under the Home Mortgage Disclosure Act.

"It's the normal, completely above-board, totally appropriate way for an agency to register its views," Barr said. "That's why you have a notice and comment process. There's no indication at all that Treasury did anything improper to try to delay or impede the issuance of the rule, which is the only thing they're not allowed to do."

Others said Treasury, acting on behalf of the administration, may have been trying to distance itself publicly from the OCC's proposal, and send a message to consumer groups reinforcing its position on preemption.

"If it weren't for political purposes, why wouldn't this have been resolved by the people on these two views privately?" said Laurence Hutt, a partner with Arnold & Porter LLP. "It's being aired publicly for one reason, and that is to make a political statement."

Industry observers also wondered about the long-term impact of the letter, and whether it could be used by consumer groups or state advocates to help advance preemption-related litigation against banks or the OCC.

The courts are supposed to give deference to the regulator in its interpretation of a rule that it must administer, and some former OCC staffers said they didn't see the Treasury letter carrying any special weight in court.

But Arthur Wilmarth, a professor at George Washington University Law School and a consultant for the Conference of State Bank Supervisors, said Dodd-Frank may have weakened the deference that the OCC is afforded in court.

"I would think that a court would look at the Treasury letter and say, 'OK, this is not the primary regulator, but nevertheless it's an important government agency," he said. Without the previous deference, known as Chevron deference, Wilmarth said, "I think the Treasury letter takes on much more significance."

The letter could also have implications for the nomination of a new comptroller.

Preemption experts said a nominee is sure to face questions about their views on preemption at a nomination hearing. The letter may indicate that the White House is looking for a comptroller that takes a more favorable views of states' rights when it comes to banking regulation.

Some observers noted that the administration bypassed Julie Williams, the senior deputy comptroller, when it picked an acting OCC head, partly because of her strong views on preemption. But John Walsh, the acting comptroller since August, has proven to be just as adamant on the issue.

"Maybe they're feeling the sting of that decision now, and it may drive them to appoint someone very quickly," said Jeffrey Taft, a partner at Mayer Brown.


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