Oklahoma, South Carolina and Michigan joined a lawsuit challenging the constitutionality of the 2010 Dodd-Frank Act, which overhauled financial regulation and created the Consumer Financial Protection Bureau.
The states, in an amended complaint filed today in federal court in Washington, said they’re only challenging the portion of the Dodd-Frank law that empowers the Treasury Secretary to order a liquidation of a financial company whose collapse may threaten the stability of the banking system.
The laws “denies the subject company and its creditors constitutionally required notice and a meaningful opportunity to be heard before their property is taken,” the states said in the complaint.
The lawsuit was filed in June by a small bank in Texas and the Competitive Enterprise Institute, a group that advocates for limited government, alleging that the law setting up the CFPB violates the U.S. Constitution because Congress doesn’t appropriate its budget, the president has limited ability to remove its director and the courts face restrictions in reviewing its actions.
Charles Miller, a Justice Department spokesman, declined to comment on the filing. The government has until Oct. 26 to respond to the original complaint, according to court records.
Oklahoma and South Carolina are among a group of Republican state attorneys general that declined to sign cooperation agreements with the consumer bureau, part of an escalating Republican revolt against the agency that began in the U.S. Congress.
Richard Cordray, the agency’s director, asked all 50 states in March to sign a memorandum of understanding designed to protect confidential information shared among states and the bureau. To date, only 12 states -- all but one with Democratic attorneys general -- have signed, according to the bureau and documents obtained in a public records request.
Dodd-Frank was enacted in 2010 to curb the kinds of transactions that led to the 2008 financial crisis. In addition to creating the CFPB, it imposed new rules on derivatives, limits the ability of banks to trade on their own account and imposes an array of new rules for mortgages.
Dodd-Frank allows the federal government to block states from recovering investments if a bank fails, Oklahoma Attorney General Scott Pruitt said in an e-mailed statement.
“Dodd-Frank empowers un-elected federal bureaucrats to pick winners and losers, liquidate entire companies, and decide which contracts are kept and which are broken, without congressional oversight or proper judicial review,” South Carolina Attorney General Alan Wilson said in an e-mailed statement.
“If a large financial institution fails, holding state pension contributions and tax dollars, the states have very little ability to recover their citizens’ assets,” he said.
Michigan’s public-employee pension funds hold “substantial fixed-income investments” in financial companies, Michigan Attorney General Bill Schuette said in an e-mailed statement.
“This lawsuit is necessary to safeguard Michigan’s pension funds and protect current and future retirees,” he said.
The lawsuit, filed by the State National Bank of Big Spring, Texas, argues in addition that the CFPB’s structure violates the principle of separation of powers. The bank also challenged Cordray’s appointment.
Defendants include Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro, Commodity and Futures Trading Commission Chairman Gary Gensler and Cordray.
The bank is being represented by C. Boyden Gray, a former White House counsel to President George H.W. Bush who is a member of the board of directors of the Federalist Society, a conservative legal group.
The case is State National Bank of Big Spring v. Geithner, 12-cv-01032, U.S. District Court, District of Columbia (Washington).