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Regulation by Guidance

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In an opinion this week, United States District Court Judge Ronnie Abrams dismissed a complaint filed against the Federal Reserve Bank of New York (FRBNY) by a fired employee. The case turned, in part, on whether a Fed advisory letter is "a law or regulation," which would trigger the application of whistleblower protection. The employee--a FRBNY bank examiner--alleged that she lost her job in retaliation for refusing to change an exam report finding of noncompliance with SR-08-08, Fed guidance related to compliance risk management programs. The Fed, citing as authority a paper drafted by international banking regulators, issued SR-08-08 to clarify its views on compliance for large, complex banks. In its defense in this case, the FRBNY pointed out that SR-08-08 was not promulgated through a notice-and-comment process or published in the Code of Federal Regulations, two hallmarks of a binding regulation. The court agreed that "SR-08-08 is an advisory letter that does not carry the force of law."

While the court's view that the document is not legally binding on banks is correct as a matter of administrative law, the former employee also appears to be correct that the Fed acts as if SR-08-08 is binding. As the plaintiff noted, the Fed routinely includes compliance with SR-08-08 as a condition in settled enforcement actions. The settlements refer to SR-08-08 as "guidance," but nevertheless compel compliance with that guidance. SR-08-08 is full of directives to large banks, including some very specific ones, such as a requirement that compliance risk management programs be documented and specific board obligations. What will Fed examiners say when banks, armed with the FRBNY's defense in this case, argue that they do not have to set up compliance programs that conform to a mere guidance document?

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Isaac Gorodetski
Project Manager,
Center for Legal Policy at the
Manhattan Institute
igorodetski@manhattan-institute.org

Katherine Lazarski
Press Officer,
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.