The United states Court of Appeals for the Second Circuit affirmed a district court’s holding that federal law preempts state regulation of a national bank operating subsidiary to the same extent that it preempts regulation of the parent national bank. Wachovia v. Burke, Case No. 04-3770-CV, 2005 WL 1607740 (2nd Cir. July 11, 2005). The court stated that the history of the banking laws indicates that operating subsidiaries have been treated distinctly by Congress and the OCC, and no statute speaks directly to the scope of federal versus state power over them. The court found that Congress apparently has intentionally left open a gap concerning the treatment of national bank operating subsidiaries. Thus, the court stated the OCC has the authority to fill that gap by defining a national bank’s incidental powers to include conducting the business of banking—business that the national bank itself could conduct directly—through an operating subsidiary. Having so defined a national bank’s power to conduct business through an operating subsidiary, the court found the OCC further has the authority to preempt states law concerning operating subsidiaries to the same extent that those laws would be preempted with respect to the parent national bank.

    The court stated that it must defer to the regulations if they reflect a reasonable construction of the statutory scheme. The court concluded that the OCC regulations reflect a consistent and well-reasoned approach to preempting state regulation of operating subsidiaries so as to avoid interference with national banks’ exercise of their powers under 12 U.S.C. § 24 (Seventh) and their ability to use operating subsidiaries in the dynamic market of banking and real estate lending. Thus, the court held that it must defer to the OCC’s authorized and reasonable implementation of the National Bank Act and apply the operating subsidiary regulations.

    Wachovia filed suit in April of 2003 challenging Connecticut’s authority to license and supervise Wachovia Mortgage Corporation, a wholly-owned operating subsidiary of Wachovia Bank, N.A. Wachovia claimed that federal law preempts the authority of state officials to regulate the operating subsidiaries of national banks. Thirty-five state attorneys general, supported by 43 state bank commissioners, had filed an amicus brief in support of Connecticut Banking Commissioner John P. Burke in the district court.

    􀂗 Mike Tomkies and Elizabeth Anstaett