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From Banking and Finance Law Daily, June 8, 2015

Waters urges President to keep financial reforms out of TPP

By J. Preston Carter, J.D., LL.M.

In a letter to the White House, Representative Maxine Waters (D-Calif) urged President Obama to keep U.S. financial reforms out of the Trans Pacific Partnership (TPP). Waters, Ranking Member of the Financial Services Committee, fears that the TPP could “undermine essential financial reforms,” including those passed as part of the Dodd-Frank Act, and she asked the President “to ensure, at a minimum, that the TPP’s investment terms, including investor-state dispute settlement, will not apply to financial measures.”

The letter underscored what Waters sees as the limitations and interpretive uncertainties of the standard “prudential exception” clause in U.S. trade agreements, which purports to give countries the “policy space” to enact financial measures for prudential reasons. Waters stated that the language in the prudential exception provision is widely viewed by legal scholars and trade experts as ambiguous, undefined, and to date, untested.

Although U.S. Trade Representative Michael Froman told the House Democratic Caucus that the Administration would be able to successfully defend the Dodd-Frank reforms, Waters noted that the “ultimate determination” as to whether a challenged financial policy or government action was taken for legitimate prudential reasons, and whether it is actually protected by the prudential exception, would be decided by private international arbitration panels. As currently proposed, she continued, the TPP would allow financial regulations to be challenged not just by other governments, but also by individual financial firms via investor-state dispute settlement (ISDS).

Waters said the ISDS tribunals operate autonomously from any government authority, and their decisions are often unpredictable and are neither bound by precedent nor subject to substantial appeal. It seems “profoundly misguided,” she said, “to trust in an ambiguous ‘prudential exception’ subject to review by private ad-hoc investment panels that have become increasingly controversial.”

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