Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

February 14, 2013

Suit Contests Validity of CFPB, FSOC, Liquidation Power, and Recess Appointment

By Mark S. Nelson, J.D.

A collection of private interest groups and U.S. states have filed a second amended complaint in the federal court for the District of Columbia alleging the unconstitutionality of several key Dodd-Frank provisions (State National Bank of Big Spring, et. al. v. Neil S. Wolin, et. al., Complaint, Filed February 13, 2013, Huvelle, E.). Specifically, the plaintiffs attack the Consumer Financial Protection Bureau (CFPB), the Financial Stability Oversight Council (FSOC), and Title II's orderly liquidation authority. The plaintiffs also claim that CFPB Director Richard Corday's recess appointment was unconstitutional.

Who's who among the parties. The plaintiffs represent both private and government interests. State National Bank of Big Spring is a federally-chartered community bank organized under Texas law with deposits of $275 million. The bank alleged that the CFPB's final rules on international remittances and the CFPB's power to retroactively declare lending practices unfair injure the bank by hindering its business prospects.

60 Plus Association (60 Plus) is an IRC Section 501(c)(4) group that promotes limited government regulations on a nonprofit and nonpartisan basis. 60 Plus said that it has been injured by the CFPB's power to restrict banks' powers to offer credit and other products to seniors. The Competitive Enterprise Institute (CEI) is an IRC Section 501(c)(3) entity seeking to protect individual liberty and limit government regulation. CEI has checking, deposit, and brokerage accounts in entities regulated by the CFPB and which FSOC has said are systemically important.

The eleven state plaintiffs claim to be injured by Dodd-Frank's Title II orderly liquidation authority. These states assert that they operate pension plans and other entities that fall within the FDIC's Section 210 powers to liquidate failed institutions.

The federal government defendants represent those agencies charged with implementing the challenged Dodd-Frank provisions. These parties include the Fed, U.S. Treasury, FDIC, CFPB, FSOC, and numerous individual officials, including the SEC's and CFTC's chairmen in their roles as FSOC members.

CFPB—Cordray Appointment. Count I of the complaint alleges that Dodd-Frank Title X, creating the CFPB, violates separation of powers. According to the plaintiffs, the CFPB has broad regulatory powers without any meaningful checks and balances. The plaintiffs said this gives the CFPB too much unchecked discretion to affect U.S. financial affairs.

Likewise, the complaint alleges that the president's recess appointment of CFPB director Richard Cordray violated the U.S. Constitution's appointments clause. Article II, §2, Cl. 2 states that the president:

"… shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments."

The plaintiffs claimed that the president needed Senate confirmation to appoint Mr. Cordray because the Senate was in session at the time of Mr. Cordray's appointment. The complaint also noted that the Senate has power to control its schedule under Art. I, §5, Cl. 2. The plaintiffs said that the Senate voted to remain in session on December 17, 2011, and in fact was in session when the president made Mr. Cordray's appointment.

Although not mentioned in the complaint, the U.S. Court of Appeals for the District of Columbia recently overturned presidential recess appointments to the National Labor Relations Board (Noel Canning v. National Labor Relations Board, January 25, 2013, Sentelle, D.). The D.C. Circuit noted that Article II, §2, Cl. 3 states that: "[t]he President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session." The court held that "recess" means "intersession recess." The court also held that recess appointments must "happen" or "arise" during the recess. Because certain NLRB members were not validly appointed, the board lacked a quorum, and the action taken by it was deemed void.

FSOC powers. Dodd-Frank Title I created the FSOC to oversee issues that systemically affect the U.S. and global economies. The Act also gives the FSOC power to designate nonbank financial institutions as systemically important and thus subject to greater government scrutiny. The plaintiffs claimed that FSOC's ability to make this designation confers implicit government-backing to designated firms and disadvantages firms without this implied backstop. According to the plaintiffs, this gives FSOC nearly unfettered power without any meaningful checks and balances.

Orderly liquidation. The plaintiffs claimed that Dodd-Frank's Title II orderly liquidation powers overreach constitutional bounds. Under Title II, upon the recommendation of other federal regulators, the Treasury secretary may initiate the liquidation of a failed financial institution. FDIC then acts as liquidation receiver.

The complaint alleged that Title II confers too much power on the Treasury secretary to decide which firms will be liquidated. The complaint also said that Title II gives the FDIC power to choose favorites from among a failed institution's creditors. Moreover, Title II allegedly runs afoul of Article V due process requirements because of the attenuated notice period and the ability to cherry-pick the creditors of failed institutions.

The case is No. 1:12-cv-01032.

Attorneys: Gregory F. Jacob (O'Melveny & Myers, LLP) for State National Bank of Big Spring, 60 Plus Assoc., Inc., and Competitive Enterprise Institute. Luther Strange for the State of Alabama. Samuel S. Olens for the State of Alabama. Derek Schmidt for the State of Kansas. Bill Schuette for the State of Michigan. Timothy C. Fox for the State of Montana. Jon C. Bruning for the State of Nebraska. Michael DeWine for the State of Ohio. Alan McCrory Wilson for the State of South Carolina. E. Scott Pruitt for the State of Oklahoma. Greg Abbott for the State of Texas. Partick Morrisey for the State of West Virginia. Sam Kazman for The Competitive Enterprise Institute. Bradley Heath Cohen, U.S. Department of Justice, for Timothy F. Geithner, the U.S. Department of the Treasury, Richard Cordray, the Consumer Financial Protection Bureau, Benjamin Bernanke, Martin Gruenberg, Thomas Curry, Mary Schapiro, Gary Gensler, Debbie Matz, S. Roy Woodall, Financial Stability Oversight Council, Janet L. Yellen, Daniel K. Tarullo, Elizabeth Duke, Jeremiah Norton, Jerome Powell, Thomas M. Hoenig, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corp., Jeremy B. Stein and Sarah Bloom Raskin.

Companies: 60 Plus Assoc., Inc.; The Competitive Enterprise Institute; Federal Deposit Insurance Corp.; U.S. Department of Treasury; The Consumer Financial protection Bureau; The Board of Governors of the Federal Reserve System; The Financial Stability Oversight Council

LitigationEnforcement: DistrictofColumbiaNews DoddFrankAct

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.