Is the Dodd-Frank Financial Regulation Bill Unconstitutional? Maybe the IMF Policy Instructions

by Julian Ku

The massive U.S. financial regulation legislation, known as “Dodd-Frank”, is finally heading to President Obama for signature.  In addition to containing a partial reversal of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, the bill also contains some rather stern instructions for the U.S. representative at the International Monetary Fund.  The instructions are so stern that they would almost certainly have led President Obama to issue a signing statement refusing to abide by this provision due the president’s exclusive constitutional powers over foreign affairs, as he did last year. But due to a new approach announced in January, the President will no longer attach signing statements. He’ll simply ignore those parts of the law that are unconstitutional without actually saying so when he signs the bill. I am not sure this is an improvement, but it seems to make everyone happy. In any event, this provision seems to qualify as one that the Obama Administration will ignore (although we won’t actually know if they will ignore it or not).


The Bretton Woods Agreements Act (22 U.S.C. 286 et seq.) is amended by adding at the end the following:


‘‘(a) IN GENERAL.—The Secretary of the Treasury shall instruct the United States Executive Director at the International Monetary Fund—

‘‘(1) to evaluate, prior to consideration by the Board of Ex- ecutive Directors of the Fund, any proposal submitted to the Board for the Fund to make a loan to a country if—

‘‘(A) the amount of the public debt of the country exceeds the gross domestic product of the country as of the most recent year for which such information is available; and

‘‘(B) the country is not eligible for assistance from the International Development Association. ‘‘(2) OPPOSITION TO LOANS UNLIKELY TO BE REPAID IN

FULL.—If any such evaluation indicates that the proposed loan is not likely to be repaid in full, the Secretary of the Treasury shall instruct the United States Executive Director at the Fund to use the voice and vote of the United States to oppose the proposal.

‘‘(b) REPORTS TO CONGRESS.—Within 30 days after the Board of Executive Directors of the Fund approves a proposal described in subsection (a), and annually thereafter by June 30, for the duration of any program approved under such proposals, the Secretary of the Treasury shall report in writing to the Committee on Financial Services of the House of Representatives and the Committee on Foreign Relations and the Committee on Banking, Housing, and Urban Affairs of the Senate assessing the likelihood that loans made pur- suant to such proposals will be repaid in full, including—

‘‘(1) the borrowing country’s current debt status, including, to the extent possible, its maturity structure, whether it has fixed or floating rates, whether it is indexed, and by whom it is held;

‘‘(2) the borrowing country’s external and internal vulnerabilities that could potentially affect its ability to repay; and

‘‘(3) the borrowing country’s debt management strategy.’’.

One Response

  1. Many commenters opined that the Dodd-Frank bill will particially reverse the Supreme Court’s Morrison decision with respect to the SEC extraterritorial jurisdiction.  The bill’s provision in question, however, talks about expanding the jurisdiction of federal courts to hear actions brought by the SEC with extraterritorial elements.  In Morrison, Justice Scalia stated that the issue of extraterritorial reach of U.S. securities laws is not jurisdictional but substantive.  Several other scholars noted the same.  To give the SEC the power to try actions with extraterritorial elements under Section 10(b), Section 10(b) itself would need to be amended.  I think there is at least a question as to whether the bill will actually allow the SEC to bring extraterritorial actions under Section 10(b).

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