If the U.S. financial industry can no longer block the dozens or potentially hundreds of new regulations mandated by the sweeping reform legislation enacted in July, then at least it can try to slow the imposition of those rules.
Two high-powered groups representing top financial institutions and their lobbyists are pleading for just that sort of relief. Their stated intention is not to sidestep or dilute the many, often complex provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which only Congress can amend. Rather, they argue, regulators and ultimately the firms they regulate have too much to do in too short a time, posing a risk of shoddy rulemaking with unintended, negative consequences down the road.
The Committee on Capital Markets Regulation, which bills itself as a nonpartisan research organization and has produced influential reports in recent years on post-crisis reforms and systemic risk issues, has warned all along against hasty handling of the Dodd-Frank rules. In a Wall Street Journal commentary on August 5, CCMR co-chairman Glenn Hubbard, dean of the Columbia Business School, and director Hal Scott, professor at Harvard Law School and director of its Program on International Financial Systems, took Treasury secretary Timothy Geithner to task for stressing “an obligation of speed” in translating the Dodd-Frank statutes into enforceable regulations. They wrote that Geithner’s vow was “impossible to fulfill” and would “leave a pall of uncertainty hanging over business decisions.”
By December 15, that editorial position had morphed into a five-page, single-spaced, legalistic brief that CCMR sent to the chairmen and ranking members of the Senate Banking Committee and House Financial Services Committee: Senator Christopher Dodd of Connecticut and Representative Barney Frank of Massachusetts, Democrats; and Senator Richard Shelby and Representative Spencer Bachus, both Republicans of Alabama. Signing that letter were Scott, Hubbard and the other CCMR co-chairman, John Thornton, a former president and co-COO of Goldman Sachs Group who is now chairman of the Brookings Institution and professor and director of the global leadership program at Tsinghua University School of Economics and Management in Beijing.
Nine days before the CCMR weighed in, the American Bankers Association, Financial Services Roundtable, Futures Industry Association, Securities Industry and Financial Markets Association and seven other trade groups – a unified front of financial services industry lobbyists – posted a four-page critique of derivatives rulemaking with the Commodity Futures Trading Commission and Securities and Exchange Commission. Citing concerns about too little deliberation by the regulators and not enough time to consider and react to industry feedback, the associations warned of a lack of “regulatory certainty, with the effect of unnecessarily interfering with the functioning of markets and the usefulness of important financial tools.”
Three associations from the group of eleven – the Futures Industry Association, International Swaps and Derivatives Association and Securities Industry and Financial Markets Association – teamed up on December 28 for another salvo aimed at the CFTC. They criticized anti-market-manipulation rules stemming from section 753 of Dodd-Frank and called for “clear and straightforward guidance to market participants as to what constitutes prohibited conduct.”
While the eleven trade groups focused mainly on derivatives rulemaking – including swaps trading and clearing provisions that split CFTC members at a December 9 meeting and forced a one-week postponement of their approval vote – the Committee on Capital Markets Regulation sought to indict “the pace of rulemaking under the Dodd-Frank Act” more broadly.
CCMR acknowledged that “regulators should act quickly” where problems and solutions are clearly understood. (Similarly, the trade associations in their letter “strongly support[ed] completion of these efforts in a prompt and timely fashion.” But they also said regulators should “use their discretion to propose, adopt and implement rules in a sequence that will achieve these important goals.”)
On the other hand, the CCMR leaders wrote, “We believe that the current rulemaking process is sacrificing quality and fairness for apparent speed, risking lengthy court challenges and poor rules that will damage our financial system and hinder economic recovery.” And they urged the legislators to hold oversight hearings to expose and correct the flaws in the rulemaking process.
Legislative Tactic
With the Senate and House in lame-duck sessions, rushing toward adjournment while preoccupied with the tax-cut extension and other high-stakes political issues, there was little prospect for any immediate scrutiny of Dodd-Frank rulemaking. But the CCMR was staking out some tactical ground for the new Congress that convenes in January: Republicans will take control of the House committee chairmanships and agendas, Dodd will have retired and Frank will be in the Democratic minority.
The CCMR letter includes data indicating the historic burden that Dodd-Frank places on the regulatory agencies. The SEC produced new rules at the rate of 9.5 a year in 2005-’06, but Dodd-Frank will ratchet that up to 59. At the CFTC, the pace will have to increase from a 5.5 average to 37 by the July 2011 Dodd-Frank deadline. (The Federal Deposit Insurance Corp. will see less of a burden, from 8 rules per year before to 6 after Dodd-Frank. The Federal Reserve Board will have to more than triple its output, from 4.5 to 17.)
“The process the federal regulators are using to create these new rules is seriously flawed,” the CCMR asserted. “Rather than using a prudent deliberative process, sweeping reforms are being quickly pushed forward without providing adequate time for meaningful fact-finding or dialogue.” The think tank noted that public comment periods for major rulemakings, which in the past often lasted 60 to 120 days, have been reduced to an average of 40 days in the case of Dodd-Frank. That “focus on speed over participation undercuts the traditional deliberate rulemaking that the public has come to expect,” the letter said.
The volume and complexity of the rules, compounded by the frequent need for joint rulemaking and coordination among multiple agencies, should call for extra time to assimilate the proposals, CCMR contended. “Instead they are getting less time. Although it is difficult for even industry trade groups to participate at this pace, it is virtually impossible for individual firms and the public at large to meaningfully participate in the process.”
The chairs of the agencies most in the firing line, Gary Gensler at the CFTC and Mary Schapiro at the SEC, have stressed and even marveled at their staffs’ productivity under the sheer weight of Dodd-Frank demands and their tight, currently inflexible deadlines. At the December 16 CFTC meeting, Gensler said, “CFTC staff was closely engaged in the legislative process to enact the Dodd-Frank Act. Staff worked many weekends to provide technical assistance to Capitol Hill and serve as a resource to lawmakers. In the 148 days since the president signed the Dodd-Frank Act into law, the staff of the CFTC has continued to work tirelessly. had more than 475 meetings with the public on rulemakings, had more than 300 meetings with other regulators and organized seven public roundtables. Including the rules that the commission will consider today, CFTC staff has recommended 34 proposed rulemakings to the commission, four advanced notices of proposed rulemaking, two interim final rules and one final rule to implement the Dodd-Frank Act.”
Gensler added, “The staff has organized eight Dodd-Frank rulemaking meetings in addition to the four other public CFTC meetings on issues related to our pre-Dodd-Frank authorities. The twelve open meetings we’ve had this year is more than we had – in aggregate – from 2000 through 2008.”
The SEC highlights its Dodd-Frank Act “accomplishments” on its Web site. As of mid-December, 39 were listed, including rules proposed on December 15 covering mandatory clearing of security-based swaps, an end-user exception from mandatory clearing, disclosure by securities issuers of “conflict minerals” in Africa and mine safety and health disclosures.
