Last year, then-Sen. Pat Toomey inserted a section into the defense spending bill to hold the Federal Reserve in check. Instead, the central bank says, the new law bolstered its authorities.
Last week, the Fed cited that legislation multiple times in its motion to
For Toomey and his former staffers, the issue is particularly frustrating, they say, because Fed staffers consulted on the legislation and insisted on the inclusion of language that was used in their dismissal argument last week.
"That looks pretty dirty," said one former Toomey staffer who worked on the bill.
"The same lawyers who were part of that conversation with us are now a part of this lawsuit," added another.
The staffers were granted anonymity to discuss the matter because they still work on Capitol Hill and sometimes engage with the Fed.
The Fed declined to comment on the accusations raised by Toomey and his staffers.
Toomey, reached by American Banker this week, said the Fed "wildly mischaracterized" his legislation, which was drafted with the express purpose of bringing more accountability to the Fed and its handling of master accounts, which he views as a public good.
The language of the legislation, Toomey said, does nothing to grant or affirm any powers or authorities for the Fed, but rather creates transparency around a subject that the central bank has historically kept closely held.
"I don't like to speculate about motives," Toomey said. "But it's pretty disturbing when you look at the simple facts and what they're arguing now."
The Federal Reserve Board of Governors — which is named as a defendant alongside the Federal Reserve Bank of Kansas City — cites two pieces of the NDAA in its latest motion to have Custodia's lawsuit dismissed.
First, it references a piece of the Toomey provision's requirement that it provide "a list of every entity that submits an access request for a reserve bank master account and services … including whether … a request … was approved, rejected, pending, or withdrawn." The Fed emphasizes the word "rejected," and argues that the legislation dispels any argument that the Fed cannot deny a master account application, as Custodia has argued.
In its lawsuit, the digital asset bank
Toomey said it was never his intent to opine on that — or any other — portion of the Custodia lawsuit. He and his staffers say they were merely stating a fact that an applicant could be denied, not whether the Fed had the authority to do so or not, or under what circumstances.
"It's ridiculous to suggest that including these categories of outcomes is somehow an acknowledgement or consent or validation of the Fed's rejection of master accounts," Toomey said. "It's simply acknowledging that it happens. It is not in any way endorsing it, or suggesting that it's legitimate. And the Fed lawyers know this very well."
Julie Hill, a University of Alabama law professor who specializes in bank regulation and payments system access, said the Fed's argument on this is weak. She said the Fed clearly has the ability to block non-bank entities from getting master accounts, but it is attempting to stretch that authority into an ability to reject certain banks, too, which has not been spelled out in law.
"They're conflating this idea that their discretion covers everything, when there are two reasons that an account might be denied. One is legal eligibility, the other potentially is discretion," Hill said. "That's what the Custodia case is about, the extent of that discretion. The Fed is saying it has near complete discretion, while Custodia is arguing it has zero discretion."
Toomey's staff consulted Hill while drafting their legislation last summer. Hill said she did not engage with the Fed during the finalization of the provision.
The other part of the NDAA cited by the Fed was a portion of the provision noting that the regional reserve banks decide which institutions in their districts can have master accounts.
"Notably, this amendment to the Federal Reserve Act limits the Board of Governors' role to publication of a database containing certain master account information from each Reserve Bank," the Fed's motion argues, "and otherwise makes clear that Congress views a master account as something a Reserve Bank — not the Board of Governors — can provide."
In its lawsuit, Custodia argues that the Board of Governors in Washington, D.C., played a role in its application for a master account
Toomey staffers say that the provision initially simply referenced "master accounts," but at the Fed's insistence, the phrasing was changed to "reserve bank master accounts."
For the provision to be added to the NDAA, Toomey — then the ranking Republican on the Senate Banking Committee — needed the approval of committee Chair Sherrod Brown, D-Ohio, as well as the heads of the House Financial Services Committee, Reps. Maxine Waters, D-Calif., and Patrick McHenry, R-N.C., to go along with the language. As is often the case with legislation dealing with regulatory agencies, the Fed's staff was consulted to make sure the bills did not make inadvertent policy changes.
Toomey staffers pushed back on the addition of the "reserve bank" terminology but eventually relented after being convinced that it was merely a technicality.
"Technical assistance is not supposed to be policy specific, but they're misusing it now to make a policy judgment," one staffer said.
Hill said in both instances, the Fed might just be making as many arguments as it can for why the case should be altered or dismissed and seeing which, if any of them, stick. Ultimately, how impactful they will be will be decided by the judges in the U.S. District Court in Wyoming.
"Attorneys are supposed to make the strongest argument for their side," Hill said. "I think it's wrong here, I think the court should deny it, but that's kind of how the judicial system works."
Still, Toomey said, the Fed's representation of his legislation furthers his belief that the institution needs to be reined in by Congress.
"Simply, it's further evidence of how important it is that we compel more transparency and more accountability here," he said.
