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States challenge constitutionality of Treasury’s liquidation authority

Attorneys general in Michigan, Oklahoma and South Carolina have joined in a suit that challenges the liquidation authority given to the U.S. Treasury by the 2010 Dodd-Frank Act.

Competitive Enterprise Institute, a conservative Texas bank and think-tank organization, filed the original lawsuit in June, Reuters reports.

Critics of Dodd-Frank maintain that the new regulations could suffocate businesses and reduce credit availability. The states party to the suit are challenging the constitutionality of certain Dodd-Frank provisions.

“The new regulations do not stabilize our economy, they create greater uncertainty,” Alan Wilson, South Carolina’s attorney general, said, according to Reuters. “Dodd-Frank replaces the rule of law with the rule of politics.”

Under Dodd-Frank, the secretary of the U.S. Treasury can liquidate a financial entity whose failure could threaten U.S. financial stability in order to prevent a future bailout similar to those that occurred following the recent financial crisis.

The states in the suit warn that the Treasury’s authority has little government oversight and could reduce the ability of the firm and its creditors to be heard. Wilson said that the state’s pension funds may have difficulty recovering assets invested in a failed financial firm liquidated by the Treasury.

Timothy McTaggart, a partner at the law firm of Pepper Hamilton, said that the lawsuit highlights key concerns about the liquidation process.

“It certainly raises some interesting issues,” McTaggart said, Reuters reports. “Of course, there’s a huge presumption that when Congress passes a law, it’s constitutional.”

The original complaint filed by the CEI also alleged that the Consumer Financial Protection Bureau and Financial Stability Oversight Council are unconstitutional because they are not subject to adequate checks by other government branches.The CFPB is funded by the Federal Reserve and is not subject to the congressional appropriations process.

“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,” Spencer Bachus, the chairman of the House Financial Services Committee, said on Thursday, according to Reuters.

The suit also challenges President Obama’s decision to appoint Richard Cordray as director of the CFPB. Though Dodd-Frank, which created Dodd-Frank, mandates that the director be confirmed by the U.S. Senate, Obama used the power of recess appointments to install Cordray.

The original complaint was amended to include the states’ challenge of the liquidation authority, though the states did not sign against the CFPB and FSOC. A lawyer for the groups said that the government has until Oct. 26 to respond to the complaints, Reuters reports.

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