By Emily Stephenson and Rachelle Younglai
Sept 21 (Reuters) - Three U.S. states have joined a lawsuit
that challenges the constitutionality of the 2010 Dodd-Frank law
that overhauled U.S. financial oversight and created the
Consumer Financial Protection Bureau.
The attorneys general of Michigan, Oklahoma and South
Carolina are challenging a portion of Dodd-Frank that empowers
the Treasury secretary to order the liquidation of failing
financial institutions, according to a complaint filed in U.S.
District Court for the District of Columbia on Thursday.
The states joined a suit filed in June by conservative
think-tank Competitive Enterprise Institute, a Texas bank and a
senior citizens group.
Dodd-Frank, passed by Congress in response to the 2007-2009
U.S. financial crisis, gives regulators broad authority to
oversee financial institutions.
It has since drawn criticism from Republicans and industry
groups who say the new regulations go too far and could strangle
businesses and restrict credit. Republican presidential
candidate Mitt Romney has pledged to repeal Dodd-Frank, but few
see that promise turning into a reality.
The states and other groups are now questioning the
constitutionality of parts of the controversial law.
"The new regulations do not stabilize our economy, they
create greater uncertainty," Alan Wilson, South Carolina's
attorney general, said in a statement. "Dodd Frank replaces the
rule of law with the rule of politics."
The lawsuit challenges a provision that lets the Treasury
secretary call for the liquidation of a financial entity whose
failure would threaten U.S. financial stability. The goal was to
prevent future bailouts of financial firms.
The states argue in the complaint that the process would
have little government oversight and restrict the ability of a
company and its creditors to be heard.
The attorneys general from the three states joining the
lawsuit are all Republicans.
Wilson told reporters on Friday that state pension funds
could struggle to recover assets invested in a firm that is shut
down using the Dodd-Frank authority. He said other state
attorneys general have expressed interest in joining the
lawsuit.
Timothy McTaggart, a partner at law firm Pepper Hamilton who
focuses on financial regulatory issues and is not involved in
the lawsuit, said questions have been raised about the
liquidation rules, such as whether the process allows enough
time for firms to participate.
"It certainly raises some interesting issues. Of course,
there's a huge presumption that when Congress passes a law, it's
constitutional," McTaggart said.
Treasury Department spokeswoman Suzanne Elio said the
lawsuit merely revives arguments that have already been made
against new Wall Street oversight. She said the department would
fight attempts to impede financial regulation.
CFPB OVERSIGHT
The initial complaint filed by the Competitive Enterprise
Institute and others claimed the CFPB and the Financial
Stability Oversight Council, which addresses risks to the
overall U.S. financial system, are unconstitutional because they
are not subject to sufficient checks by other branches of
government.
Congressional Republicans often criticize the consumer
agency for operating with what they see as too little oversight.
The CFPB is funded by the Federal Reserve rather than by
appropriations from Congress, and critics want it to be led by a
bipartisan commission instead of a single director.
"Many of us have been frustrated by the lack of
accountability in the CFPB's leadership structure and the lack
of transparency in the CFPB's funding structure," Republican
Representative Spencer Bachus, chairman of the House Financial
Services Committee, said during a hearing on Thursday focused on
the consumer bureau.
Supporters of the CFPB say it was designed to be independent
from Congress to limit the influence of outside political
pressure on its rule-making and enforcement.
The lawsuit also challenges President Barack Obama's
appointment of Richard Cordray as CFPB director, another point
of frustration to Republicans. Dodd-Frank requires the director
be confirmed by the Senate, but Obama used a recess appointment
to install Cordray at the agency.
The complaint filed Thursday was amended to include the
states' challenge against the new liquidation authority. The
states did not sign on to the challenges against the consumer
protection bureau and the oversight council.
Gregory Jacob, an attorney for the groups that filed the
complaint, said the government has until Oct. 26 to respond.
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