The Volcker rule: a reminder of the need for additional remedies for party-to-party NAFTA disputes.

• Author: Cappel, Jacob H.

When the Volcker Rule was enacted, and its proposed regulations were released, a shockwave of fear and uncertainty reverberated through the international community. The Volcker Rule, as proposed, had unprecedented extraterritorial effects on foreign financial institutions. The agencies in charge of implementing the Rule received thousands of letters from state officials and private investors across the globe expressing their fears and concerns. In one letter, the five largest banks in Canada argued that the Ride violated the United States' North American Free Trade Agreement obligations. Finally, almost four years after its enactment, the Rule's final regulations were published, which substantially allayed foreign officials' and investors' anxieties. The Rule, however, still has extraterritorial effects and more specifically, does in fact violate the United States' obligations under the North American Free Trade Agreement., This unchecked violation acts as a reminder of the need for additional remedies to prevent future North American Free Trade Agreement violations. Flawless enforcement and prevention may not be practical, but establishing an appellate review system of North American Free Trade Agreement panel decisions, and imposing more stringent penalties on violating parties, could mitigate future violations.

CONTENTS I. INTRODUCTION II. BACKGROUND A. NAFTA Chapter Eleven B. NAFTA Chapter Fourteen C. NAFTA Chapter Twenty III. THE VOLCKER RULE STILL VIOLATES NAFTA A. The Volcker Rule's Continuing Disparate Treatment B. NAFTA Chapter Eleven Violation C. NAFTA Chapter Fourteen Violation IV. THE FUTILITY OF NAFTA IN EFFECTIVELY REMEDYING THE VOLCKER RULE'S NAFTA VIOLATIONS A. NAFTA Chapter Eleven Claim 1. United States Domestic Court 2. NAFTA Tribunal i. Past Chapter Eleven Decisions ii. Applying Past Chapter Eleven Decisions to the Volcker Rule B. NAFTA Chapter Twenty Claim 1. Previous Chapter Twenty Decisions Involving the United States 2. Applying Past Chapter Twenty Decisions to the Volcker Rule V. ADDITIONAL REMEDIES FOR NAFTA VIOLATIONS A. Appellate Review of Chapter Twenty Decisions B. Compensation for Noncompliance with Chapter Twenty Decisions VI. CONCLUSION I. INTRODUCTION

"The generality of men are naturally apt to be swayed by fear rather than reverence, and to refrain from evil rather because of the punishment that it brings than because of its own foulness."

--Aristotle (2)

Congress and President Obama responded to the 2008 financial crisis by passing the Dodd-Frank Act of 2010, (3) which included the Volcker Rule (the "Rule"), (4) named for former Chairman of the Federal Reserve Paul Volcker, who long advocated for the Rule. (5) The Rule was designed to protect Americans against another financial crisis by barring depository banks from using their depositors' money for short-term and speculative trading. (6) The Rule, however, has been met with a barrage of criticism from domestic as well as foreign officials and financial institutions. (7) Before the Rule's regulations were finalized, foreign officials feared that the Rule would adversely affect their banks and reduce liquidity of the market for their sovereign bonds. (8) Specifically, the European Banking Federation criticized the Rule's extraterritorial reach, which would allow the Rule to interfere with their own regulation of their financial systems. (9) Canada's five largest banks argued that the Rule, as proposed, violated the United States' obligations under the North American Free Trade Agreement ("NAFTA"), by treating Canadian debt securities less favorably than United States' debt securities. (10) On December 10, 2013, more than three years after it was passed, (11) the Rule's regulations were finalized and published, (12) which allayed the anxieties that foreign financial institutions originally faced, by curtailing the Rule's extraterritorial reach. (13)

This Note argues that the Rule illustrates and reiterates the need for additional remedies under NAFTA's recourse mechanisms, because the current remedies are ineffective at holding NAFTA members accountable for their NAFTA obligations. The Rule, which violates the United States' obligations under NAFTA, is subject to two different NAFTA challenges: First, under Chapter Eleven, an investor (14) could file an arbitration claim for damages if she alleged that the Rule violates the United States' Chapter Eleven obligations. (15) Second, under Chapter Twenty, a party (16) could initiate a challenge-entailing a three-step process (17)--of the Rule as a violation of the United States' NAFTA obligations under any part of NAFTA, which, if the process is followed through, would result in a decision by a five-member arbitral panel. (18) These mechanisms, however, have proved to be ineffective in holding NAFTA parties accountable for violations, especially the United States. Therefore, the Rule reiterates the need for additional remedies under NAFTA's recourse mechanisms.

Part II of this Note provides a background to NAFTA, focusing on Chapters Eleven (Investment), Fourteen (Financial Services), and Twenty (Institutional Arrangements and Dispute Settlement Procedures), because they are most applicable to the Rule. Part III explains why the Rule may violate NAFTA Chapters Eleven and Fourteen. Part IV explores the two current NAFTA recourse mechanisms listed above (available under Chapters Eleven and Twenty), and explains the futility of each in general and when specifically applied to the Rule. Part V looks at additional NAFTA remedies, specifically appellate review of Chapter Twenty decisions, and an assessment of compensatory damages against a noncomplying party. Part V also makes a case for why these additional remedies are steps in the right direction to enhance parties' compliance with NAFTA.

2. BACKGROUND

   In 1994, the United States, Canada, and Mexico entered into NAFTA (19) in order to "create an expanded and secure market for the goods and services produced in their territories," and "establish clear and mutually advantageous rules governing their trade," among other things. (20) Since its inception, NAFTA has produced economic growth throughout North America, including higher-paying jobs and enhanced choice and purchasing power for North American consumers, families, farmers, and businesses. (21) In 2009, United States foreign direct investment in the other NAFTA parties was $357.7 billion and the other NAFTA parties' foreign direct investment in the United States was $237.2 billion. (22) These figures represented a significant portion of each countries' gross domestic product, especially Mexico and Canada. (23)

   From a legal perspective, NAFTA offers three different recourse avenues for NAFTA violations: First, Chapter Eleven enables investors to file arbitration claims against parties for alleged Chapter Eleven violations. (24) Second, Chapter Twenty enables parties to initiate a dispute resolution process regarding the interpretation or application of any part of NAFTA. (25) Third, Chapter Nineteen provides a mechanism for review of domestic antidumping and countervailing duty determinations. (26)

   For purposes of this Note, Chapter's Eleven, Fourteen, and Twenty are relevant, because they are most applicable to the Rule. Chapter Eleven provides substantive obligations that the Rule may violate, (27) and also provides a recourse mechanism for investors. (28) Chapter Fourteen provides substantive obligations that the Rule may violate, (29) and Chapter Twenty provides a recourse mechanism to parties for alleged Chapter Fourteen violations. (30)

   1. NAFTA Chapter Eleven

      Chapter Eleven imposes three important substantive obligations on parties. First, Articles 1102-04 impose an equal-treatment rule, which requires parties to treat other parties' investors and investments (31) at least as favorably as it treats its own. (32) Second, Article 1105 requires parties to treat investors of another party "in accordance with international law, including fair and equitable treatment and full protection and security." (33) Third, Article 1110 requires parties to avoid nationalizing or expropriating investments of investors of other parties, unless it is done for a public purpose, on a non-discriminatory basis, in accordance with due process and a minimum standard of treatment under international law, and the expropriating or nationalizing party provides a payment of compensation. (34)

      The second part of Chapter Eleven focuses on the dispute mechanism, which allows an investor to choose from three arbitral tribunals for an alleged NAFTA violation by a party: (1) the World Bank's International Centre for Settlement of Investment Disputes (ICSID); (2) ICSID's Additional Facility Rules; and (3) the rules of the United Nations Commission for International Trade Law (UNCITRAL Rules). (35) Additionally, an investor may choose to bring a NAFTA claim for damages in a domestic court. (36) But an investor would have to waive her right to initiate or continue any action in domestic court if she wanted to seek arbitration in a NAFTA tribunal. (37) Chapter Eleven is unique in that it provides a private right of action, which is a departure from the traditional exclusive state-to-state dispute resolution mechanisms available in most international agreements. (38) Before the Trade Act of 2002, (39) the United States was skeptical that frivolous Chapter Eleven claims would stifle legitimate policy efforts, (40) because if an investor wins a Chapter Eleven claim, the losing party is left to pay the damages through taxes. (41) The Trade Act of 2002, however, provided a means to eliminate frivolous Chapter Eleven claims against the United States. (42) A final arbitration award is binding on the investor and the party to the arbitration, and the losing party is required to enforce the award. (43)

   2. NAFTA Chapter Fourteen

      Chapter Fourteen covers financial services, which are broadly defined. (44) Chapter...