No Footing for States|in Dodd-Frank Challenge

     (CN) – Eleven states and a bank cannot challenge the Dodd-Frank Act’s constitutionality when the financial reform law has never been applied to them, a federal judge ruled.
     Lawmakers passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 as “a direct and comprehensive response to the financial crisis that nearly crippled the U.S. economy beginning in 2008,” according to a Senate report.
     The law established, among other things, the Financial Stability Oversight Council, to identify companies on the verge of becoming “too big to fail”; the Orderly Liquidation Authority, a process for quickly and efficiently liquidating large financial institutions; and the Consumer Financial Protection Bureau, a consumer advocacy group for the financial sector.
     Eleven states and three private groups – the State National Bank of Big Spring (Texas), the 60 Plus Association and the Competitive Enterprise Institute – claimed the provisions establishing these agencies violated the Constitution.
     The oversight council “has sweeping and unprecedented discretion to choose which nonbank financial companies to designate as ‘systematically important,'”they argued. They said the law also “empowers the Treasury Secretary to order the liquidation of a financial company with little or no advance warning, under cover of mandatory secrecy, and without either useful statutory guidance or meaningful legislative, executive, or judicial oversight.”
     U.S. District Judge Ellen Huvelle in Washington, D.C., acknowledged that the plaintiffs’ legal standing was difficult to parse.
     “This is an unusual case, as plaintiffs have not faced any adverse rulings nor has agency action been directed at them,” she wrote. “Most significantly, no enforcement action – ‘the paradigm of direct governmental authority’ – has been taken against plaintiffs.”
     Huvelle determined that the states lack standing because they failed to show that they would suffer from a “certainly impending” injury should the provisions stand.
     “It is entirely speculative that the states will be among the creditors to be worse off” following a liquidation, Huvelle wrote.
     She added that the states and bank sued before any of the challenged provisions had been invoked against them.
     The bank argued that it has standing as a direct competitor of financial companies that the government has deemed “systematically important financial institutions” (SIFI) – in other words, too big to fail. These include American International Group, Prudential Financial Inc. and the GE Capital Unit of General Electric.
     “The bank speculates that the designation will cause investors to flock to the designees because they will be perceived as safer investments due to the possibility of government backing,” Huvelle explained. “Of course, SIFI designation does not, in fact, mean that the federal government is ‘backing’ the SIFI or that the government will not allow the company to fail. Instead, it means that the SIFI will be subject to more stringent regulation and government oversight.”
     The bank “is worried about the hypothetical possibility of an enforcement action or a threat of litigation by a mortgagee,” Huvelle wrote.
     “These possibilities are simply too speculative.”
     She dismissed the case for lack of standing and ripeness.

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