Todd Phillips on Basel III, Chevron, Crypto

currencies and commodities. Essentially, if it's in your portfolio, we cover it. This podcast series examines the intersection of business policy and law. And I'm Nathan Dean, an analysts with Boomberg Intelligence covering financials policy.

governing federal regulators. Before entering academia, and Phillips served as an attorney for the Federal Deposit Insurance Corporation, the Administrative Conference in the United States, the ioshoppers representatives, and the Center for American Progress. And if you've watched the CFTC or the ICEC or the House Financial Services Committee, you've seen Todd testify and provide expertise and information to both

the regulators and the policymakers. Todd holds a jd from the University of Michigan and a BS at economics and political science from Arizona State University. So Todd, thank you very much for joining and welcome to the Votes and Verdicts podcast.

never happened again. The way I thought about doing it, the way I found to do it was to go to law school and to work in financial regulation, and I've been here ever since. It's been a really crazy ride with the ups and downs since the financial crisis, but it's great. I'm glad to be in this work speaking to folks like you, and as you mentioned, working for agencies testifying on the Hill. It's just been a great experience.

Chevron defference. So I want to start by asking you about that, since there are a pair of cases pending in the Supreme Court that the conventional wisdom expects will sort of curtail, if not get rid of Chevron deference altogether. I know a lot of our listeners are familiar with Chevron, but for those that aren't, I'll just explain it briefly.

It refers to one of the most important principles in administrative law, named for a nineteen eighty four Supreme Court case Captions Chevron versus the Natural Resources Defense Council, and in that case, the courts set forth a legal test for when courts should defer to an agency's interpretation of a federal statute and and the holding the decision held that if a statute is ambiguous, courts should defer to

the agency's interpretation so long as it's reasonable. And just as a shameless plug for BI for Bloomberg Intelligence, I'll mentioned here that our litigation and policy team has recently put out what we call a deep dive on the demise of Chevron deference and the various sectors and policies that will be most affected by the Supreme Court's anticipated ruling.

So again, the conventional wisdom, of course, is that Chevron defference has been good for democrats, since democratic regulators tend to be more aggressive in terms of rule making and as a result, judicial deference to those regulators is a

good thing in that view. But in your article from early May, I think you make a really interesting point that I think all also gets overlooked a lot, and that point is that Chevron deference has not been good for progressives when it comes to banking laws because crudential banking regulators like the OCC historically have taken an expansive view of the conduct that commercial banks are allowed to engage in, and courts have had to defer to those

OCC regulations. So you know, the article is called Chevron and Banking Law. What's good for the goose isn't good for the gander. You published it in the Yale Journal on Regulation. I'd love it if you could, you know, sort of walk us through your article in some more detail, because again, I do think you make a very underappreciated point.

But that hasn't always been the case. In fact, the original Chevron case in the eighties was about the Reagan administration's EPA trying to roll back some strong regulations from the prior Carter administration, and in that case, the Supreme Court said, sure, we'll let you go ahead and do this roll back. The argument I make in the piece is that progressives today are really wrong to be arguing

that Chevron really is good for progressive values. I've spoken to a lot of folks in the environmental space who say that we need Chevron to allow the EPA and some of the other environmental agencies to solve the climate crisis and do all sorts of other really progressive minded things. And in the piece I argue that in banking we already have really really strong progressive banking laws on the books. The National Bank Act of eighteen sixty four really constrains

what national banks are allowed to do. Congress further in the Glass Stegal Act of nineteen thirty three made clear that for state banks, they're also significantly constrained in what they can do, really limiting them to the quote unquote business of banking. And the piece goes through how starting in the eighties up through the early two thousands, bank regulators across both political parties use Chevron deference to expand

the activities that banks could undertake. They expanded that definition of the business of banking with the approval of the courts, to allow banks to engage in derivatives activities, to offer products that mirrored securities investments. They allowed banks to issue deposit products that mirrored s and P five hundred index funds. So it gave you the same economics of investment of investing through a banking lens. And the courts blessed all

of these things. And one of the things I argue is that it's this expansion of banking law under the Chevron lens that really led the Great findancial Crisis in two thousand and seven two thousand and eight to occur. It was this expansion of what banks could do under the lens of Chevron that caused all of the calamity

that we saw in the mid odds. And so this piece really is a plea to my fellow progressive scholars and advocates to just not take Chevron deference as a de facto progressive good and promoting progressive values, but that we can and should make strong arguments without relying on Chevron, that agencies can do good things, or that courts should constrain agencies from doing bad things without Chevron. As you noted, the Supreme Court's currently figuring out what to do with Chevron,

whether to keep it going in the future. We should have an opinion about that coming out within the next month or two. And I imagine that we will have a whole new world when when that happens, and we're going to have to figure out how to make progressive policy arguments without Chevron. And this is one way to do it.

it that way. One of the things I'm sure that your listeners are concerned about, and it's something I'm concerned about too, is what happens to all of the court

cases that relied on Chevron. We have thirty forty years of precedent right now where courts have been applying Chevron to existing statutes like the ones I talked about with the Business of Banking, and if when the Court Constraints revises overalls Chevron, all of those cases are are likely going to have to be reinterpreted anew or under a new test that the Supreme Court puts forward. And and let me tell you, that's that's going to be a mess.

I really don't know what's going to happen. I would love to be able to give the listeners some better sense of what the world will be like.

as unlikely that as that seems to be. But I'm wondering how you sort of thread that needle hoping for it to survive, but also you know, making the point that it has been sort of bad for the banking industry.

role of judges, I think Chevron makes sense. Even though you know as the article talks about, I think Chevron has been really really bad for banking.

Basil three Accords that set international standards for bank capital. Now, in July of twenty twenty three, the financial banking regulators, so this is the FED, the FDIC, and the Office of the Control or the Currency, proposed to rule that would increase capital requirements by as much as nineteen percent for those globally systemic banks like Bank America, City Group in JP Morgan, regional lenders you know, in our analysis

could see around a five percent increase. Now, there's been intense industry pushback to the proposal, and we've seen statements from both the FED Chairman and the FED Vice chair Michael Barr that broad im material changes are coming.

to prognosticate about what we're going to see. I think that is a political compromise that's going to need to happen. As an aside, one of the things that I think has been missing from the discussion about what a revised

endgame is going to look like. Most media has focused on the political dynamics of the FED, and one thing I want to make clear to your listeners and perhaps reporters who are listening, is that this is a regulation that's really going to that is by necessity going to include a vote of the FED, vote of the FDIC, and a vote of the OCC And so whatever we see is going to have to have it's going to have to get the vote of J. Powell, and it's also going to have to get the vote of row

hit Chopra on the FDICE. And I don't know how they're going to thread that, but just conceptually, I think what we're going to see is something that can get the approval of those two by necessity, just the way that the vote of the agencies is going to have to shake out.

an about face here. You know, was this a situation of an own goal or do you think that what the FED originally And I'm using the FED here just because you know a lot of it, Like you pointed out, it's a free agency. But you know, how did we get into a situation like this where the proposal going from proposed to finalized could change so drastically?

you know, the normal process working. Okay, But to your point about how how there was so much pushback, my understanding is that endgame really is Michael Barr's not white whale, but like it is the thing that he came into the position wanting to do. It's the thing he has been pushing or it's the thing he wants to do

before he leaves the job. And because it's something that has to be voted on by the three agencies, my understanding is that the the rule is further to the left than it might otherwise have been because of the FDIC. And so, you know, I don't know exactly what happened, but I can imagine a situation where, you know, the three agencies move further to the left than two of them were comfortable with in order to get the FDIC on board, and said, all right, we'll see what kind

of comments we get. We are receiving the comments, and there is some very significant pushback, and I imagine the folks at the FDIC who wanted to push it further to the left are are likely see this and thinking, okay, we need to moderate in order to ensure that this actually gets across the finish line.

by this point exactly. But you know, I guess my last remaining question before I turn it back to Elliott is Bloomberg News is reported that they can finalize this by August.

without a legal challenge. The other thing I note is that there are what thirty something banks to which the endgame rule will apply, maybe more, And it only takes one to sue. I mean, I think everyone's predicting that it's going to be BPI that sues. But if the consensus is that, you know, BPI shouldn't, it only takes one to actually, you know, pull the trigger and file the documents challenging the rule.

the SEC's enforcement action against Coinbase. As I'm sure most of our listeners know, the SEC sued Coinbase in June of twenty twenty three, alleging that the company was operating as an unregistered exchange broker in clearing agency, and one of the company's arguments for getting the case dismissed was that the enforcement action violated the Major questions doctrine again

for listeners who don't know. The Major questions doctrine is a recently articulated Supreme Court doctrine that says that if an agency seeks to decide an issue of major national or economic significance, its action must be supported by clear congressional authorization in a statute you and others filed in amicus brief. Some say amkus. I still say amicus an amicus brief in the case arguing that the SEC's enforcement action should not and does not trigger the major questions doctrine.

And indeed, when Judge Bala ruled on Coinbase's motion a few months ago, and she rejected Coinbase's major questions argument, and she essentially adopted your reasoning at least part of it. Can you walk us through your arguments that you made in your amaricus brief in why the major questions doctrine should not apply to enforcement actions like the one against Coinbase.

kind of usurping the role of the legislature. And my co author bo and my argument is that, well, there is no separation of powers issue here with the SEC's crypto related enforcement actions because Congress wrote a law, wrote the Securities Act of thirty three, in the Exchange Act of thirty four, the executive branch, the SEC is bringing an enforcement action. An enforcement action is just the prototypical article to executive action, and they're asking a court to adjudicate,

which is exactly what courts are supposed to do. So there is no separation of powers violation here. It's just every branch of government doing what that branch is supposed to do, and therefore the Major Questions doctrine doesn't apply. As you noted, Judge Fela seems to have agreed with that, and I appreciate it. I will also note that it seems like the crypto industry has also bought our argument, and we've seen the last couple of lawsuits that have

been filed that Major Questions doctrine. The Major Questions doctrine hasn't been raised, which is great. The question, I think

is what the Supreme Court will do. As I think you guys know from Twitter, I've been saying that the crypto industry's play here is to bring lawsuits in Texas and the Fifth Circuit Court of Appeals, which is clearly the most conservative court in the country, seems like they want to create a circuit split where the Fifth Circuit rules one way on crypto and DC in New York rule another way, and that circuit slit will cause the Supreme Court to uh to take up the case and

rule on the issue of crypto for what it's worth. I don't think you need the Major Questions doctrine to get at that. I think the question is, you know, will will the court? Will the Supreme Court read the how we test as applying to crypto assets? And but between the three of us and the listeners, I think

that's going to be a very hard sell. And I wrote a report for the Roosevelt Institute a couple of months ago, where I said that, you know, I think crypto proponents are making a a decent, not not perfect, but also not terrible argument that that how we test doesn't apply to crypto assets. I think that if this gets up to the Supreme Court, the Supreme Court might

buy that. It might change the how we test to just say that the way crypto assets are initially issued these days just doesn't comply or they're not securities, they don't have to comply with the securities laws. And I think that could remove from the SEC a lot of its existing authority that has been relying on to regulate crypto I am, I am very scared of that happening, and I and I I give it a decent chance of happening.

Court way. That aligns with Coinbase's argument, which is that you know, an investment, especially for sales on the secondary market, that an investment contract requires some sort of post sale obligation that travels with the asset. And you know, again, I'm not sure you have that with the type of secondary market transactions at issue in the coinbase case, but

we'll see where it goes. And I and you also make the point that you know, it makes legislation even that much more important if you know you're an advocate of the sec having some jurisdiction here, because otherwise you're going to get a railroaded by the Supreme Court down the road.

or introduced two years ago. At this point because it created a regulatory regime for crypto commodities while still leaving the the SEC's jurisdiction intact. It basically said that everything that is a security, and we're not defining what a security is. We're just leaving it up to the existing securities lawns. All crypto assets that are securities go to the SEC. All crypto assets that are commodities go to

the CFTC. And I think courts are going to, you know it presumed courts are going to figure out where a particular cryptotoken lies, is it a security or not. I also think that Congress, you know, given what I talked to about what the Supreme Court might do here, I think Congress really should enact new legislation codifying the Howie Test and codifying a very broad view of what the Howie Test encompasses so that the Supreme Court can't rewrite it. I don't know if that's going to happen.

I would put money on that not happening, but that that is my hopes and dreams.

Protection Bureau. You mentioned Rohee Chopra earlier, just because as our listener may not be aware, he sits on the board of the fdi C. But Director Choprah had a good month. The Supreme Court upheld the CFPB's funding is constitutional, you know, so that gives a little bit more extra life. I mean, I know there are more court cases the CFPB has to deal with out there, but CFPB knows how they're going to get paid. So if I'm an employee over the CFPB, I'm feeling a little bit better

these days. So if I'm Director Chopra, what am I going to do now? Am I like just let out of the gate and I'm going to be running hard? Has enforcement threat increased any more?

things that had been kind of backlogged. The There have been maybe about a dozen firms that had, uh, you know, moved to challenge enforcement actions or challenge civil investigative demand saying that the agency is unconstitutional. Now that the Supreme Court has pushed that aside, those existing challenges can go forward. I think Director Choper right now is on cloud and I and is doing just everything that he wants to do, knowing that there are no big hurdles, no more big

constitutional hurdles standing in his way. I think we'll just see quite a few more lawsuits coming down the line and enforcement actions. We saw yesterday. I think it was that they put out a rule saying that buy now, pay later accounts or credit cards subject.

last couple of years at least. And I also am not you know, I have seen cases raise and non delegation argument against the CFPB's funding structure, which was not part of the payday lending case I went to the Supreme Court. So I think that argument is still alive. I'm not saying that they're gonna be successful arguments. I am just saying I wouldn't be surprised to see them raise in the future.

employed at one of those payday lending firms. But to your point, I think the CPBs here to stay. You know, the risk If you're listening to this and you're in the risk or compliance function, it's probably something that you're most likely going to have to be dealing with over the next few years. So I wanted to just turn this to more of a macro level question. And this is where I'm going to play my game of Todd. You are now the president of the United States in

the twenty twenty four election, President Biden. President from however, scenario. They defer to you. You're in the new president in charge, and you are going to look at your financial regulatory team and the second administration, and you're going to say what should you do? And you know, I'm going to presume that it's going to be things like continue the Bosle three a game if it's not finalized other rules. But should private credit be a focus? Is there more

work related to cus for protections? Should the incentive compensation proposal that come up be finalized? What would you do?

of that, outside the purview of the regulatory regime. I mean, I know, we have more disclosure now so that FSOC can see what's happening, but we need more oversight and regulation of that. The other thing I'd say, which is really just coming on the scene now, is we need to deal with FinTechs and banking as a service. I don't know if you or your listeners have seen the whole meltdown of synapps that's going on right now, where we had a kind of a middleman for banks somehow

seem to lose customer money and go bankrupt. I'm still trying to figure out exactly what's going on, but the fact that there are customers who are who are relying on FinTechs for their deposit accounts and can't get money out and the bank regulators seem to be inhibited from acting is a really big problem. And just in terms of pure consumer protection, this is a giant blind spot that seems to be imploding right now, and we need

to do something. We need our bank regulators and or the CFPB to really get their arms around making sure that that that neo banks, FinTechs that are moonlighting as banks are well regulated, and that consumers are well taken care of.

just absolutely my jam. I will tell you I once saw them open for Imagine Dragons at some theater in the DC area, and I was pissed when the people in front of me were talking while they were playing, because I'm like, who is here to actually see Imagine Dragons. I'm here to see Metric.