DODD-FRANK: TOO MANY REGULATIONS TOO FAST?
The Dodd-Frank Act is considered by many to be the most significant piece of financial reform legislation since the securities laws were written in the 1930s. It also may well contain more directives to agencies to write new rules and conduct studies than most legislative acts. To date the SEC, CFTC and other agencies have been moving forward with a host of rule making projects. Is it to many regulations to fast?
The answer is “yes” according to The Committee on Capital Markets Regulation. The Committee has requested in a letter addressed to Senate and House leaders that each chamber hold hearings on the implementation of the Act through rule making. Essentially, the letter argues that critical new rules are being written to fast with inordinately short comment periods and, perhaps more importantly, in a somewhat piece meal fashion with an inadequate prospective on the overall issues.
The Committee on Capital Markets Regulation is a non-partisan group co-chaired by Glenn Hubbard, Dean of Columbia Business School, and John L. Tornton, Chairman of the Brookings Institute. Its Director is Hal S. Scott, the Normura Professor and Director of the Program on International Financial Systems at Harvard Law School. The letter is signed by each of these gentlemen and addressed to Senators Christopher Dodd and Richard Shelby and Representatives Barney Frank and Spencer Bachus. A copy, dated December 15, 2010, is available here
The letter begins by emphasizing the unique challenges presented by the Dodd-Frank Act. Not only does the legislation require that a large number of rules and studies be undertaken but, more importantly, the regulations to be written represent “almost a complete rewrite of the rules governing the country’s financial markets.” At the current pace of rule drafting there is simply inadequate time for businesses and individuals who will be impacted by the regulations to consider the proposals or for the agencies to frame and consider appropriate measures.
The letter goes on to make the following key points:
• Reforms: Sweeping reforms are being made through new regulations using a process which is “seriously flawed” because there is insufficient time for a meaningful dialogue.
• Number of rules per year: The average annual rate of rulemaking per year prior to Dodd-Frank for the SEC was 9.5, the CFTC 5.5, the FDIC 8 and the Federal Reserve 4.5 Post Dodd-Frank the average for the SEC is 59, the CFTC 37, the FDIC 6, and the Federal Reserve 17.
• Speed: Major rule makings traditionally have not been undertaken until the agency has extensively surveyed the landscape and gave careful consideration to the issues. During 2005 and 2006 the SEC, CFTC, Federal reserve and FDIC on average allowed more than 60 days for public comment following such a deliberative process and often 90 or 120 days. In contrast in the first three months after the passage of Dodd-Frank those same agencies and the new Financial Stability Oversight Counsel gave on average just over 30 days for comment. That period has now been expanded to an average of about 40 days. The period is to short, particularly in view of the fact that in November alone the financial regulators issued nearly 40 proposed rules.
• Drafting: The new proposals are being created essentially in bits and pieces rather than to solve a problem. Thus the letter notes that “instead of regulating in order to solve a particular problem and pursue a coordinated policy objective, regulators have been proceeding rule by rule. By treating each rule somewhat independently, and in no particular order, the results may be haphazard.”
The letter concludes by noting that while “a long period of implementation creates uncertainty, with a possible drag on the economy . . . “ what may be far worse is a bad process which produces rules that might “interfere with the proper functioning of the financial system for years to come . . .”