Rethinking Bretton Woods | Sun, Nov 25, 2012
This article reports on litigation efforts by the financial industry to limit implementation of the Dodd-Frank Act.
One of the results of the last US general election is that the financial overhaul passed in 2010, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (or “Dodd-Frank Act”) is with us to stay. With President Obama being handed a second term in office and a Democratic Party majority staying in the Senate, even if the majority in the lower legislative chamber continues to be controlled by the opposition, the prospects for a repeal of the legislation are nil.
But attempts to undermine the implementation of the law are far from over. Litigation that questions either the constitutionality of provisions of the law or the actual authority granted by it to the regulatory agencies in charge of implementation has been one of the avenues so far used to weaken Dodd-Frank. Given the unlikelihood of a repeal, an intensification of this strategy is expected.
So far no less than six rules have been challenged before courts, some of them yielding successful outcomes for the challengers.
--In one of the earliest lawsuits, a rule issued by the SEC on proxy access was questioned by the Chamber of Commerce and the Business Roundtable.[i] The legislation authorized the SEC to issue proxy access regulations giving shareholders greater influence over the director-nomination process, “under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors.”[ii] In exercise of such authority the SEC issued a rule requiring companies to include in their proxy materials the name of a people nominated by a qualifying shareholder or group of shareholders for election to the board. A court vacated the rule on the grounds of the SEC’s failure to adequately consider its effects upon efficiency, competition and capital formation, as required by law. It decided also that the SEC “failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial concerns raised by commenters.”[iii]
The decision represented a strategically important win for Dodd-Frank opponents providing what has been considered a very low bar for allowing lawsuits against rulemakings not just by the SEC but also by other agencies. [iv]
--A lawsuit brought by TCF National Bank in 2010, shortly after passage of the law, challenged the constitutionality of the so-called Durbin Amendment. This provision directs the Fed to enact regulations that limit the amount of interchange fees that certain banks can charge retailers on debit card transactions. The argument wielded by the complainant was that the Durbin Amendment violated the bank’s Constitutional rights by taking its property without just compensation and due process of law, and without providing equal protection under the law.[v]
The lawsuit was dropped in 2011, but not before the Fed backtracked from its original attempt to cap fees at 12 cents per transaction (in favor of a cap at 21 cents per transaction), as well as in other aspects of the rule. In withdrawing the lawsuit, TFC Bank declared that it still considered the law unconstitutional but that the Fed had responded to some of the concerns it had made in its case.[vi]
--A lawsuit brought by large commodity traders against the Commodity Futures Trading Commission questioned the application of position limits. The Dodd Frank Act authorized the CFTC to restrict the amount of contracts that can be held by any one trader and its affiliates during a given time period. The provision represented a success for advocates concerned with the negative impact that traders have on driving high and volatile prices of food and fuel by holding excessive contracts for purely speculative purposes, and with little collateral or even real funding to back such transactions. In the end, the actual position limits set by the CFTC were at a level that would barely have an impact on traders, but this did not stop them from suing.
The text of the law prescribes that the CFTC “shall by rule, regulation, or order establish limits on the amount of positions, as appropriate, ….” A point of contention in this case was, therefore, whether, as the plaintiffs argued, the words “as appropriate” qualified the “shall” authorizing the CFTC to set position limits only if appropriate, or whether, as the CFTC argued, “as appropriate” applied to the amount of position limits that Congress categorically had obliged the agency to set.[vii]
The court found in favor of the plaintiff. In addition it considered the CFTC had not done an adequate cost-benefit analysis for each and every position limit. This was, however, clearly an impossible requirement to meet given that the data needed for such an assessment has not been collected due to the deregulatory trends embodied in the Commodity Modernization Act of 2000.[viii]
The Court’s judgment is currently being appealed by the CFTC.
--A lawsuit brought by Competitive Enterprise Institute last September questions the constitutionality of Dodd Frank provisions on the establishment of the orderly liquidation authority for winding down failing companies. The plaintiffs also question the constitutionality of the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, on the grounds that they are not subject to adequate checks by other branches of government. The threat to the CFPB is particularly worrisome for consumer advocates. The CFPB is housed at the Fed but not dependent from the Fed, and its budget is determined as a function of the Fed’s budget, not dependent from Congressional appropriations each year.[ix] But these characteristics were precisely as a result of tireless efforts during the financial reform process that, against all odds, prevailed over the countervailing efforts of the financial lobbies, to ensure that the agency would have certain safeguards to pursue its inquiries and rulemakings on an independent basis.[x] An erosion of such guarantees would make the agency easy prey to the pressures that the financial industry lobby, via its sway in Congress, has been placing on other regulatory agencies via starving them of funding for their growing tasks.
--A lawsuit filed by the Chamber of Commerce, American Petroleum Institute and others seeks to overturn rules issued by the SEC on disclosure of payments by some companies. The rule implements Dodd Frank Act requirements that oil, gas and mineral companies listed on the SEC disclose payments to each government annually, broken down, country by country and project by project. This was an important achievement by advocates of transparency and tax justice, by making it easier to track and neutralize global companies’ practices to avoid and evade taxes in jurisdictions where such taxes should duly be paid.[xi]
The provision in the law was arguably lenient – for instance, the requirement that other payments such labor costs, profits, etc. be also disclosed, did not make it into the legislation. Yet, the lawsuit was filed and it argues, like the previously –mentioned case on “proxy access,” failure by the regulator to weigh costs and benefits.
--A lawsuit recently filed by CME Group, a Chicago-based exchange, is questioning another portion of the legislation that seeks greater transparency in derivatives markets. In this case, the rule issued by the CFTC that is under challenge is one that requires that derivative clearing organizations submit information on processed transactions to data warehouses (called “swap data repositories” in the Dodd Frank Act). It is part of a framework to ensure greater transparency in an obscure market that today trades more than USD 600 trillion. For instance, in 2008, the opacity of this market was largely responsible for the fact that financial firms cross-exposures were impossible to estimate, thus forcing the hand of the government to provide a bailout.
The exchange argues that the agency overstepped the boundaries of the law, which requires releasing the data, but not that the private information be turned over specifically to other data warehouses.[xii]
According to a report, however, what would be behind this lawsuit is CME’s own application to become itself a swap data repository. The CFTC held up such application last summer over reluctance by CME to release the data in real time. Allegedly, the firm would be looking to release data in web posts while making a profit by selling the “real time” stream to clients.[xiii]
Unfortunately, given the constitutional arguments several of these lawsuits are expected to climb all the way up to the Supreme Court. This means that uncertainty clouding the regulation process will drag on. This has negative effects not only domestically, but also on the global financial reform agenda, as detractors of financial reform in other jurisdictions demand that their own regulators reciprocally slow the pace of implementation.
[i] Bus. Roundtable & Chamber of Com. of the United States. v. Sec. & Exch. Comm’n, 647 F.3d 1144 (D.C. Cir. 2011
[ii] Dodd-Frank Act, 971(b).
[iii] Wolters Kluwer Law and Business Briefing 2011. D.C. Circuit Vacates SEC Proxy Access Rule as Arbitrary and Capricious. Special Report. July.
[iv] McGrane, Victoria and Jean Eaglesham 2012. Battle Plan Shifts On Dodd-Frank, in Wall Street Journal, November 9.
[v] Atwood, John 2010. Minnesota Bank Files Lawsuit Against Dodd-Frank Provision, October 28.
[vi] Marx, Claude 2011. TCF Bank Drops Interchange Lawsuit Against Fed, in Credit Union Times, June 30.
[vii] Suppan, Steve 2011. U.S. Judge Thwarts Commodity Markets Reform, October 10, available at http://www.iatp.org/blog/201210/us-judge-thwarts-commodity-market-reform
[ix] Caliari, Aldo 2011. Drawing Lessons from US Financial Reform Efforts. CCFD Terre Solidaire and Center of Concern, February, at 27.
[x] Ib., at 40.
[xi] Ib., at 29.
[xii] Protess, Ben 2012. Regulator Faces Another Lawsuit Over Dodd-Frank, in The New York Times. November 9.