Chevron Deference and Dodd Frank

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Dodd-Frank was central to the wave of regulatory reform triggered by the financial crisis of 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act, to give it its full name, has always been quite cumbersome and difficult to enforce. Its implementation has relied to some extent on the legal concept called “Chevron deference”. Following the intervention of some Atlantic fishermen, supported by billionaire backers, the Chevron Deference was revoked by the conservative leaning Supreme Court last week.

What Was Chevron Deference?

The Chevron Deference was applied in situations where Congress had written a law including unclear sections. Established by the Supreme Court in 1984, it stated that courts should generally defer to a government agency’s interpretation of the law, if that interpretation was reasonable. This gave agencies implementing the law some leeway to fill in the gaps. It has been a central pillar of legal interpretation for the 40 years since.

Chevron and Dodd-Frank

Dodd-Frank is a complex law, and until now Chevron Deference has played a big role in how it was enforced. When a provision was ambiguous, the Consumer Financial Protection Bureau (CFPB) or other agencies tasked with Dodd-Frank might issue a rule interpreting it. If a company challenged the rule in court, Chevron Deference meant the court would likely uphold the rule as long as the agency’s interpretation was reasonable.

Big banks and free market activists have railed against the way Chevron Deference allowed agencies to write stricter rules than some might have expected from the law’s text. The agencies argued that this approach strengthened consumer protections and limited riskier financial activities. The legislation was far wider than Financial Services of course, but the infamous 8,843 pages of Dodd Frank made it very relevant to the sector. The law’s complexity means that businesses can be genuinely unsure about what’s actually allowed or prohibited, leading to court challenges and long waits for agency interpretation.

The Future

Legal specialists have warned that overturning the Chevron doctrine could lead to a new wave of litigation from banks challenging the agencies’ standards. A lack of conciseness and clarity has been part of the problem though so hopefully this departure will encourage regulators to draft more focused and precise rules that can survive legal challenges. Existing rulings are not going to be overturned, however, if weakened regulation is a consequence then there will eventually be some scandal, large or small, as a result.

In our part of the industry, the global direction of travel remains unchanged and the rules, especially in EMEA are clear in scope. So, while trading organizations may seek to challenge certain areas of capture, surveillance and supervision requirements, the smart companies will continue to work towards solutions that represent the best endeavor in identifying anomalous, non-compliant and criminal behavior in financial markets.

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