State AGs challenge to Dodd-Frank ramps up debate over law’s constitutionality

The decision by several state attorneys general to join in challenging the constitutionality of the 2010 Dodd-Frank Act last week has highlighted and expanded the debate over the controversial financial reform law.

“The fact that AGs are bringing it gives it more credibility than if it just came from a stand-alone bank in Texas,” Ralph “Chip” MacDonald, III., a partner at the Atlanta-based Jones Day, said, according to American Banker. “They’re committing their states’ funds and their reputations to it.”

Competitive Enterprise Institute, a conservative Texas bank and senior citizens group, originally filed the lawsuit in June. The lawsuit challenges the liquidation authority given to the U.S. Treasury by Dodd-Frank. The U.S. Treasury has the ability to liquidate any financial identity whose failure would threaten the stability of the American financial system.

State AGs from Michigan, Oklahoma and South Carolina maintain that the privilege would have little government oversight and restrict the ability of a firm and its creditors to be heard.

“Just like in Obamacare — where the claim was that it was done to save the healthcare industry — the same thing is being said about Dodd-Frank: that we can’t have another 2008 meltdown and that Dodd-Frank is designed to prevent that from happening,” South Carolina Attorney General Alan Wilson said, adding that the law “doesn’t really focus on some of the main problems” and that it “just consolidates power in D.C.,” American Banker reports.

Critics of the legal challenge, however, maintain that certain provisions of Dodd-Frank created an appeals process to be used by creditors of a failed firm, adding that the process is similar to that used by the Federal Deposit Insurance Corp. to close depository institutions.

“It’s a difficult argument to make that the Title II authority is unconstitutional,” Jeffrey Taft, a partner with law firm Mayer Brown, said, according to American Banker. “There is some due process in Title II that is provided to institutions that are designated as covered financial companies. A court is going to have to look at that and see whether it’s adequate due process. But there clearly is contemplated due process within Title II.”

A statement from a Treasury spokesperson said that the lawsuit “just rehashes old arguments of those who oppose Wall Street reform,” American Banker reports.

Other individuals maintain that the multi-state claim only highlights how unpopular Dodd-Frank is with certain industries and areas in the U.S.

“The case’s focus on Dodd-Frank’s authorization of the secretary of the Treasury to place non-depository institution companies into a federal receivership underscores the dramatic increase in federal authority over such companies, and when coupled with the law’s limited judicial review and new resolution regimes, raises legitimate issues,” Thomas Vartanian, a partner at Dechert, said, according to American Banker.

MacDonald said that the political circumstances surrounding the legislation cannot be ignored, adding that a court challenge allows Dodd-Frank critics to more loudly vocalize their concerns.

“Some of these elements of Dodd-Frank probably weren’t debated enough in Congress…” MacDonald said, American Banker reports. “Whether one agrees with it or not there is tremendous political pressure [for these AGs] to fight the incumbent party on these issues. AGs, at the end of the day, do think about the political elements as well as the practical elements.”

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