Friday, December 30, 2011

Evaluating Dodd-Frank

   The financial services industry, like most other industries, devotes a great deal of attention to the regulatory process. Many of us in school learned the phrase "The president proposes; Congress disposes." The nation's chief executive proposes regulation, but it is the job of Congress to see those legislative proposals embodied in law as Congress sees fit.

   However, the second half of the equation might be "Congress directs; the regulatory agency effects." Congress upon the president signing a bill into law will direct the appropriate executive agency to implement and monitor the law. And this occurs through the regulatory process. How regulations are implemented and monitored is something most executives in the industry pay close attention to. Witness Gramm Leach Bliley, Sarbanes Oxley, and Dodd-Frank over the last decade or so.

   If you've been involved in the regulatory process, either from the perspective of a regulatory agency or an industry subject to regulation, you have to come away with a good deal of respect for the process. For regulators the challenge is to develop rules that conform with Congress' intent on a particular law. For industry the challenge is to protect the commercial viability of whatever is being regulated.

   It is a unique system where regulators seek comment from the public, evaluate thousands of pages of commentary and propose rules which in some form eventually make their way into the Code of Federal Regulations. The regulators I've been fortunate to work with take their job seriously, work hard, and want to get it right the first time. Most of the time the process works pretty well.

   However, it seems that this system, which has worked so well for so long, is struggling under the sheer weight of several pieces of sweeping, magisterial legislation. Among these is the Dodd-Frank Wall Street Reform Act.

   An editorial in the Wall Street Journal earlier this week claims that a new study shows that the quality of federal regulation is declining. It points to Dodd-Frank and the Accountable Care Act as examples. The Journal cites a Government Accountability Office report on the implementation of Dodd-Frank, Dodd-Frank Act Regulations: Implementation Could Benefit from Additional Analysis and Coordination.

   The regulatory agencies responsible for monitoring Dodd-Frank have a great deal of discretion and are not required to follow the guidance of the Office of Management and Budget, which states that regulatory agencies should include cost-benefit analyses in their review of existing legislation. Most of the independent regulators involved in overseeing Dodd-Frank told the GAO they try to follow the OMB guidance. But in its review of the agencies' rulemaking procedures the GAO found ten of the 32 rules implemented so far for Dodd-Frank were inconsistent with OMB's guidance on considering the benefits of a rule in light of the cost of implementing it.

      In burying the lead the GAO concluded that Dodd-Frank regulators "may be missing an opportunity to enhance the rigor and improve the transparency of their analyses."

   Perhaps more disconcerting, the GAO goes on to note that while the regulators are required to assess the impact of implementing the financial reform law, "some have not yet developed plans to review their Dodd-Frank rules." Yikes. Here we are, 18 months into Dodd-Frank, and some regulators still don't have a plan for figuring out whether the law is working as Congress intended or if the benefits being realized are worth the enormous costs of the Act. Huh?

   The Journal editorial ascribes political motivation to this decline in regulatory quality, but there may be more to it than that.

   You can blame the regulators for this sad state, but that might be like court-marshaling the troops when the general's battle plan goes awry. The real problem seems to be legislation that is breathtaking in scope, unprecedented in complexity, and  burdened with unrealistic implementation time frames. In fact, the regulators may be the first people who've actually digested and parsed what's in laws like Dodd-Frank or the ACA. It is almost inevitable that the quality of rules making and regulatory oversight would suffer.

   Let's hope that the era of panoramic, three-thousand page legislation is over and that the scope of regulatory oversight returns to its former state.

   That's my opinion. What's yours?





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