Making Rules for Rule-Makers

​By Frank Geng

Frank Geng is a freshman at the University of Pennsylvania and an associate editor of the Penn Undergraduate Law Journal.


It seems these days that we might be hard-pressed to find an issue that both Democrats and Republicans could agree on—let alone agree to co-pilot legislation. That will be the case, however, in the coming weeks as a group of three Republicans, two Democrats, and one independent prepare to introduce a piece of legislation that would reexamine the rule-making process of Wall Street regulators. Ostensibly to bring financial regulation standards more in line with the executive branch, the law will most likely create more obstacles to the already lengthy process enacting Wall Street oversight. “Reform is badly needed,” Massachusetts Senator Elizabeth Warren noted, “but this package heads in the wrong direction, giving lobbyists and lawyers more chances to block outcomes they don’t like.” [1] On a broader conceptual level, it comes down to the fundamental differences in how we view the economic consequences of regulation. But on a more mechanical level, this regulatory package seems to be a simple helping-hand to the candidates’ biggest backers.

On the specifics of the legislation, it would seem that many of the legislation’s components create unnecessary extra steps in the rulemaking process. The central theme of the bill is to mandate serious cost-benefit analyses (CBAs) to any new regulatory moves. One of the provisions, for example, would require the Congressional Budget Office (CBO) to perform these CBA reviews. [2] Coincidentally, the CBO has never dealt specifically with this type of analysis or task and as such, would stand to further delay the process without any particular value-added. Another core distraction of the legislation is the provision that suggests the creation of a new commission of appointed politicians to suggest regulatory modifications or repeals. [3] The preliminary logic would suggest that it’s simply a concern regarding any regulations that currently exist. This is not to say, however, that this process does not already exist nor does it mandate the creation of an independent panel to subvert regulatory independence in these financial watchdogs. The Dodd-Frank Act, for example, was primarily an attempt to reexamine and modify rules enacted before the financial crisis.

A similar, but perhaps, a more subtle and sinister consequence of these proposed additional structures is the possibility of legal vulnerabilities. By introducing more required analyses, the legislation inherently introduces more opportunities to dispute these analyses—a favored tactic of industry lobby groups. [4] In 2011, for example, the US Court of Appeals for the District of Columbia overturned an SEC rule created under the Dodd-Frank Act that mandated proxy access to materials of public and investment companies. [5] The three-judge panel found that the SEC’s cost-benefit analysis had not adequately assessed, “the rule’s effect upon efficiency, competition, and capital formation”. [6] The vacating of the proxy access rule marked the third overturned SEC rule in six years, as well as opened up a “blueprint” to attack other Dodd-Frank originated SEC rules. [7] In whole, the introduction of further review mechanisms as well as increased pressure on cost-benefit analyses fundamentally undermine the creation of financial regulation that was forged from the lessons of the financial crisis. As the respective heads of the Consumer Financial Protection Bureau, SEC, Federal Reserve, FDIC, Office of the Comptroller of the Currency, and the National Credit Union Administration all collaboratively wrote, “Beyond injecting an administration’s influence directly into our rulemaking, the bill also would interfere with our ability to promulgate rules critical to our missions in a timely manner and would likely result in unnecessary and unwarranted litigation in connection with our rules”. [8]

Another interesting consideration to remember with this “bipartisan” package is the constituent angle. The bill’s backers consist of Republican Ron Johnson of Wisconsin, chairman of the panel, Republican James Lankford of Oklahoma, Republican Roy Blunt of Missouri, Democrat Heidi Heitkamp of North Dakota, Democrat Joe Manchin of West Virginia, and independent Angus King of Maine. [9] Over the six politicians backing this bill, the financial services industry has contributed roughly $4.2 million total to their campaigns, according to the Center for Responsive Politics. [10] To put into more perspective, financial firms ranked within the top five contributors of five out of six of these candidates. [11]

To the same end, this move could simply be an optics effort during the campaign season. The image of bipartisan cooperation these days can sometimes eclipse the actual reasoning behind the cooperation. Though the group would still need the support of at least two more Democrats to pass the Senate floor, the reality of the bill passing is a distinct one. [12]. President Obama of course will have the power to veto any such effort, though as Edward Mills, an FBR Capital Markets policy analyst astutely noted, the President had deployed rhetoric of cutting red tape and outdated rules in his recent State of the Union address. [13] “It was a bipartisan applause line, but the devil is in the details,” wrote Mills—a bipartisan devil indeed that will emerge for ruling in the coming weeks. [14]




[1]  Finkle, Victoria. “Proposed Legislation Would Add Scrutiny of Wall Street Regulators”. New York Times. Jan. 19, 2016. http://www.nytimes.com/2016/01/20/business/dealbook/proposed-legislation-would-add-new-scrutiny-of-wall-street-regulators.html
[2] Editorial Board. “Deregulating Corporate America”. New York Times. Jan. 19, 2016. http://www.nytimes.com/2016/01/19/opinion/deregulating-corporate-america.html?_r=0
[3] Ibid.
[4] Finkle, Victoria. “Proposed Legislation Would Add Scrutiny of Wall Street Regulators”. New York Times. Jan. 19, 2016. http://www.nytimes.com/2016/01/20/business/dealbook/proposed-legislation-would-add-new-scrutiny-of-wall-street-regulators.html
[5] Brunger, Melinda, Dodd, Jeff, and Scott Olson. “DC Circuit Panel Vacates Proxy Access Rule”. Andrews Kurth Insights. July 28, 2011. https://www.andrewskurth.com/insights-815.html
[6] Ibid.
[7] Ibid.
[8] Finkle, Victoria. “Proposed Legislation Would Add Scrutiny of Wall Street Regulators”. New York Times. Jan. 19, 2016. http://www.nytimes.com/2016/01/20/business/dealbook/proposed-legislation-would-add-new-scrutiny-of-wall-street-regulators.html
[9] Ibid.
[10] “Top Industries” Center for Responsive Politics. https://www.opensecrets.org/politicians/industries.php?cycle=2016&cid=N00032546&type=I&newmem=N
[11] Ibid.
[12] Finkle, Victoria. “Proposed Legislation Would Add Scrutiny of Wall Street Regulators”. New York Times. Jan. 19, 2016. http://www.nytimes.com/2016/01/20/business/dealbook/proposed-legislation-would-add-new-scrutiny-of-wall-street-regulators.html
[13] Ibid.
[14] Ibid.

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