Three key Supreme Court decisions, including one rejecting liability for lawyers, accountants and bankers who aid in the violation of securities laws, have been on the chopping block in the Senate’s debate on major financial reform legislation. One survived an amendment attempt Wednesday, but two remain on the endangered list.
The Senate, voting 60-35 late Wednesday, rejected a proposal by Sen. Sheldon Whitehouse (D-R.I.) to overturn the 1978 decision in Marquette National Bank of Minneapolis v. First of Omaha Service Corp. In Marquette, the justices ruled that the 1863 National Bank Act preempted state interest rate regulation. The Court interpreted the word “located” in the act to mean the location of the business and not the location of the customer. The decision opened the door for national banks to relocate to states that lack interest rate limits.
The Whitehouse amendment would have changed the law to make clear that credit card companies and other national bank lenders — no matter where in the country they are located — must abide by the interest rate limits of the states in which their customers reside.
Robert Lawless of the University of Illinois College of Law has written that the decision “laid the groundwork for the consumer credit culture we have today and is arguably one of the most momentous (but often overlooked) Supreme Court decisions of the last fifty years. Also, as an interpretation of a technical provision in a 110-year old statute, Marquette might also win the prize for the Supreme Court decision with the most unintended consequences.”
After the Senate vote, Whitehouse said in a statement, “States should have the right to protect their residents from usurious and excessive interest rates, and I will keep fighting to stop the practice of allowing those states with weak consumer protection to set the standard for the rest of the nation.”
Last year, he introduced the Empowering States’ Right to Protect Consumers Act (S. 255) to overturn Marquette. Whitehouse said yesterday he would continue to push stand-alone legislation.
Sen. Arlen Specter (D-Pa.) has an amendment that would overturn the Supreme Court’s rulings in Stoneridge Investment v. Scientific-Atlanta (2008) and Central Bank N.A. v. First Interstate Bank N.A. (1994).
The amendment, which has drawn significant opposition from the U.S. Chamber of Commerce and strong support from investor and consumer groups, such as Americans for Financial Reform, would impose civil liability on those who knowingly aid and abet securities fraud.
When Specter introduced his amendment earlier this month, Lisa Rickard, president of the Chamber’s Institute for Legal Reform, said the proposal would “greatly expand an already broken securities class action system whose primary beneficiaries are a handful of plaintiffs’ lawyers making huge sums at the expense of millions of small investors.”
However, Heather Booth, executive director of Americans for Financial reform, said, “Nothing creates moral hazard like providing immunity for knowing and active fraud participants.”
Whether Specter will get a chance to bring the amendment before the full Senate may depend on whether Democratic leaders fail again, as they did on Wednesday, to end debate on the reform legislation and move to a final vote.
Marcia Coyle can be contacted at firstname.lastname@example.org.