Bank Of Tokyo Mitsubishi Sues DFS And Alleges That DFS Has No Investigatory Or Enforcement Authority Over It Since It Is Now Federally Licensed

by Shearman & Sterling LLP

On November 7, 2017, in the midst of a pending examination by, and implementation of previously agreed upon consent orders with, the New York State Department of Financial Services (“DFS”), the Bank of Tokyo Mitsubishi UFJ (“BTMU”), Japan’s largest bank, converted its New York and other U.S. branch office licenses from state to federal licenses. This prompted DFS to issue an order asserting that it still had authority to investigate and prosecute violations of New York law by BTMU.  BTMU then filed suit in the United States District Court for the Southern District of New York seeking to enjoin DFS from exercising any authority over BTMU.  Complaint, The Bank of Tokyo-Mitsubishi UFJ, Ltd. v. Maria Vullo, No. 1:17-cv-08691 (S.D.N.Y. Nov. 8, 2017), ECF No. 1. 
Prior to BTMU’s license conversion, DFS had reportedly been investigating the bank’s safeguards related to, among other things, U.S. sanctions and anti-money laundering.  In the middle of this investigation and regulatory examination, on October 30, 2017, BTMU applied to the Office of the Comptroller of the Currency (“OCC”) to convert its New York and other state-licensed branch offices into federally-licensed branch offices.  Under section 4(f) of the International Banking Act of 1978, any branch operated by a foreign bank pursuant to the law of a U.S. state may be converted to a federally-licensed branch with the approval of the Comptroller of the Currency.  See 12 U.S.C. § 3102(f).  OCC regulations implementing section 4(f) set out the process for applying to convert to a federal license and the standards for approval.  See 12 C.F.R. § 28.12.  BTMU followed this process and cited business and efficiency justifications for seeking to convert its licenses.
The OCC granted conditional approval of BTMU’s license applications on November 7, 2017, effectively converting the bank’s New York state licenses to federal licenses.  In response to these conversions, DFS issued an order stating that it would retain investigatory and prosecutorial authority over BTMU for any violations of law occurring before the conversion of BTMU’s licenses, and that it retains supervisory authority over BTMU until its OCC licenses become legally effective.  BTMU then filed suit in the Southern District of New York seeking, among other things, a permanent injunction against DFS, barring DFS from taking any action under its Order or otherwise interfering with BTMU’s banking operation. 
Specifically, the complaint alleges a cause of action premised on the purported federal preemption of DFS’s supervisory and investigatory authority of BTMU.  The complaint alleged that the OCC had exclusive authority to exercise “visitorial” powers over federally-licensed branches, and that DFS’s “order is preempted by federal law because it is an attempted exercise of supervisory powers over federally-licensed bank and agency offices that are now within the exclusive province of the OCC.”  Id. ¶ 5.  BTMU, in the complaint, stated that “[o]nce a branch is federally-licensed, as BTMU is now, a state regulatory agency such as DFS may not ‘prevent or . . .  significantly impair the exercise of authority’ by the OCC over that branch’s activities.”  Id. ¶ 6 (citing Watters v. Wachovia Bank, N.A., 550 U.S. 1, 12 (2007). 
This case presents an interesting and unusual development in connection with DFS examinations and investigations.  BTMU’s application came in the midst of an ongoing examination.  The arguments and issues raised by BTMU in its federal suit could potentially have significant impacts on DFS’s supervisory authority.
We will continue to monitor and report on developments in this case.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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