A major section of S. 3217, the Restoring American Financial Stability Act, establishes the Bureau of Consumer Financial Protection with the broad authority to enforce violations of whatever strikes its fancy. At the same time, the financial regulation bill empowers state attorneys general to embark on their own exciting adventures of enforcement.

The Section is Title X, entitled the Consumer Financial Protection Act of 2010. As the title’s Section 1031 lays out, the law gives the Bureau the authority to act against “a covered person or service provider” that commits “an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service…”

So now “unfair” is going to be a crime? That’s a vague standard, as are all the terms used in the list of offenses. The Bureau is supposed to develop the rules that further define its authority, and one hopes those rules clarify and limit the offenses. But it wouldn’t surprise us that enough ambiguity remains to invite arbitrary enforcement based on subjective standards.

Even more worrisome is that the bill also authorizes the 50 states and their attorneys general to enforce the same provisions. From Section 1042, “Preservation of Enforcement Powers of States”:

1) ACTION BY STATE- The attorney general (or the equivalent thereof) of any State may bring a civil action in the name of such State, as parens patriae on behalf of natural persons residing in such State, in any district court of the United States in that State or in State court having jurisdiction over the defendant, to enforce provisions of this title or regulations issued thereunder and to secure remedies under provisions of this title or remedies otherwise provided under other law. A State regulator may bring a civil action or other appropriate proceeding to enforce the provisions of this title or regulations issued thereunder with respect to any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law, and to secure remedies under provisions of this title or remedies otherwise provided under other provisions of law with respect to a State-chartered entity.

Alarmingly, there’s nothing in the legislation that would require the state AGs to stick to the same standards the Bureau of Consumer Financial Protection will promulgate. The state AGs will enjoy free rein to sue whomever they want in state court for a violation of this new consumer financial protection statute.

Some state attorneys general also engage in the dubious practice of hiring private law firms to carry out the state’s litigation. As Victor Schwartz, who chairs the Public Policy Group at Shook, Hardy & Bacon, explains it to us:

The primary motivation of these private attorneys is to maximize an award or settlement amount; motivations which may directly conflict with the public’s interest in ensuring that justice is achieved. This profit-seeking objective is particularly problematic when the private attorney works on a contingency basis.

It’s not hard to imagine: An ambitious attorney general deciding to file a civil suit on behalf of all the state’s citizens against some company that did something “unfair,” and then hand over the litigation to a private law firm interested in the biggest payout possible. It could be good politics, but it would be hell on the rule of law.

The Senate this afternoon again failed to invoke cloture on a motion to proceed on S. 3217, the financial regulation bill, by a vote of 57-41. The vote will undoubtedly elicit media coverage about the politics of the votes, the partisan positioning and who could be hurt for the 2010 elections. All worthy topics, but it would sure be nice if the delays were used by journalists and the public to look more closely at what’s in the bill. We shouldn’t have to wait until after the bill is passed to identify its invitations to litigation and political abuse.

Free-market and conservative think tanks have joined a letter objecting to the financial regulation bill, S.3217, Restoring American Financial Stability Act of 2010.

John Berlau of the Competitive Enterprise Institute posts about and reprints the letter at National Review’s The Corner, “Dodd Bill: Bailouts, Taxes, and Overregulation.” This paragraph from the letter is worthy of note:

“Proxy access” and corporate governance provisions would take power from states and empower progressive interest groups — from unions to animal rights: Even though they have little justification in preventing the next financial crisis, the bill contains “proxy access” provisions that would empower union pension funds and other progressives by forcing companies to fund their Saul Alinsky-style campaigns for a company’s board of directors. Combined with other items federalizing incorporation law — like a mandated majority instead of plurality standard for director votes — this could enable special interest activists to harm the interests of ordinary shareholders and encourage corporate directors to cut deals with them on things like card check, cap-and-trade, and kicking conservative media personalities off the air.

The National Association of Manufacturers and other major business groups joined in a letter earlier this month criticizing the corporate governance provisions as well. Excerpt:
(continue reading…)

Marketwatch, “Senate committee approves controversial derivatives bill“:

WASHINGTON (MarketWatch) — Big commercial banks would be forced to shed lucrative derivatives trading operations under provisions of controversial, sweeping legislation to regulate the $450 trillion derivatives market that was approved Wednesday by the Senate Agriculture Committee.

The vote was 13-8 with all Republicans opposed except for Sen. Charles Grassley, R-Iowa. The committee has 12 Democrats and nine Republicans.

The bill establishes a clearinghouse and collateral requirements for trading in derivatives, and has important exemptions for many businesses, such as manufacturers, airlines, and other commercial “end users.” Marketwatch quotes Dorothy Coleman, the NAM’s top tax policy person: “We are encouraged that the bill approved this morning by the Senate Agriculture Committee recognizes the importance of these risk management tools to end-users like manufacturers.”

Marketplace also talked to the NAM in this story, “Some industries cheer derivatives vote.”

Committee Chairman Blanche Lincoln’s news release, “Bipartisan Bill Passage will Pave Way to Ending Backroom Wall Street Deals.”

UPDATE (8 a.m.): Wall Street Journal’s piece is good, “Grassley Bucks GOP, Backs Derivatives Curb.” There is, of course, much, much more in the financial reg legislation than just derivatives regulation. The consumer finance protection agency could have huge implications.

Washington Post, “FDA plans to limit amount of salt allowed in processed foods for health reasons“:

The Food and Drug Administration is planning an unprecedented effort to gradually reduce the salt consumed each day by Americans, saying that less sodium in everything from soup to nuts would prevent thousands of deaths from hypertension and heart disease. The initiative, to be launched this year, would eventually lead to the first legal limits on the amount of salt allowed in food products.

Food manufacturers are undertaking serious, voluntary efforts to reduce the salt content in their products.

Voluntary? Hah!

“We can’t just rely on the individual to do something,” says Cheryl Anderson, an epidemiologist at the Johns Hopkins Bloomberg School of Public Health.

Here’s an idea. Salt is one of the most important commodities and even currencies in the history of man. The word “salary” comes from the Latin “salarium,” meaning money paid to soldiers to buy salt.

So, why not just wrap salt regulation in under the financial regulation bill in the Senate? As John Berlau of the Competitive Enterprise Institute argues, the financial regulation bill defines large (non-banking) sectors of the economy as banks in order to regulate them. If you sell salt or use it in your products, you’re a bank!

In other salt-related news, Mark Kurlansky, author of Salt, has a new book out, “Eastern Stars,” about the great baseball players from San Pedro, the Dominican Republic. He speaks Wednesday evening at the DC bookstore, Politics & Prose. Salt is a very entertaining, commodity-oriented history of the world. We were hoping Zinc was next.

UPDATE (10:10 a.m.): Walter Olson comments at Overlawyered.com:

We’ve been warning of such developments for a while, and they come as little surprise given President Obama’s pick of hyper-regulator Margaret Hamburg as FDA commissioner.

P.S. Perhaps we should invite comment from the New York Times journalist who sternly admonished an interview subject recently: “You shouldn’t trivialize issues of health and safety by calling them nanny issues.”

Manufacturing companies have been intensely engaged in the debate over legislation to expand federal regulation of the financial industry, concerned that Congress will restrict access to an important tool, over-the-counter derivatives.

Manufacturers generally support an exemption for end-users, that is, companies that use OTC derivates not to speculate, but rather to manage their risk.

“We didn’t cause the problem,” says Dorothy Coleman, vice-president for tax policy at the National Association of Manufacturers (NAM). “This isn’t speculating. We’re not making money off these transactions.”

That’s from a Bloomberg story that examines the importance of risk management for the brewing industry and users of agriculture commodities, “Let’s Have a Beer and Talk Derivatives”

Bloomberg outlines the issues more fully in a separate story, “Industry Opposes ‘Monumental’ Expansion of CFTC Power“:

A provision in the bill known as the “end-user exemption” is of particular concern to industry groups representing Koch, Lockheed Martin Corp. and Caterpillar Inc. The rule would exempt companies that use derivatives to hedge their risks in commodities, currencies and interest rates from posting margin, or a deposit against default, on over-the-counter trades.

Margin requirements would increase costs and cripple small businesses, said Paul Cicio, president of the Industrial Energy Consumers of America, whose group represents companies including Dow Corning Corp., The Goodyear Tire & Rubber Co. and Tyson Foods Inc.

And …

The Natural Gas Supply Association and the National Corn Growers Association are writing a letter to Dodd and Senators Harry Reid and Richard Shelby saying the end-user exemption is too limited, according to a draft obtained by Bloomberg. The gas association conducted a study in December that concluded that requiring end-users to clear their derivatives transactions could cost the U.S. economy as much as $900 billion.

“Without such an exclusion, energy and commodity producers will be forced to divert capital that would have otherwise been invested in producing energy, food and thousands of jobs, while risk would be increased rather than decreased,” the trade groups say in the letter.

The NAM is a leader in The Coalition for Derivatives End-Users, which supported a broader exemption included in the House-passed version of the financial regulation bill. (See this Oct. 2, 2009, letter for the coalition’s principles.)

The National Association of Manufacturers has joined a letter from a dozen major industry groups objecting to corporate government provisions proposed in financial regulation legislation. From the letter:

The undersigned organizations and institutions represent hundreds of thousands of businesses, small and large, from all sectors of the economy employing tens of millions of Americans, as well as non-profit public policy groups interested in fostering entrepreneurship and shareholder return for retail investors.

Our organizations strongly support legislative and regulatory reform that will protect investors, improve the effectiveness of financial regulators, and assist capital formation. Reform that adheres to these goals is an important response to the financial crisis and necessary to spur real economic growth. In our view, the so-called “corporate governance” provisions, Title IX, Subtitle E (sections 951 through 959) and Subtitle G (sections 971 through 974) of the “Restoring American Financial Stability Act,” do not further these objectives and, for that reason, we oppose their inclusion in financial services reform legislation.

As you know, there is no evidence that the issues addressed by these provisions were responsible for the financial crisis. Moreover, we believe that their enactment will lead to serious unforeseen (and unforeseeable) consequences that will inhibit job creation, endanger the ongoing economic recovery, and prevent the American economy from reaching its full potential.

Wall Street Journal blog, “Business Groups, Obama Administration Spar Over Corporate Governance“