Barack Obama’s biggest second-term challenge isn’t guns or immigration. It’s saving his biggest first-term achievements, like the Dodd-Frank law, from being dismembered by lobbyists and conservative jurists in the shadowy, Byzantine “rule-making” process.
For purposes of illustrating the problem, this article will focus on just one of these landmark laws, Dodd-Frank. It passed more than two and a half years ago, in July 2010, but most of its rules have yet to make it through the rule-making gauntlet. While many liberals have already written it off as a total failure—some were, in fact, writing its eulogy the day it passed—it’s time we had some perspective. It’s true that it’s not as strong as many experts on financial markets had called for. It’s true that it doesn’t break up the big banks, nor fundamentally change the structure of our financial system. We may have been hoping for, say, a bulletproof SUV with state-of-the-art airbags; what we got instead are a few seat belts that need to be welded into our old rig. But as of now, those jury-rigged seat belts are the only thing we’ve got, and given the gridlock on the Hill they’re all we’re likely to get. And the truth is that they’re strong enough that the financial industry is willing to spend billions of dollars to keep them from being installed.
As of now, roughly two-thirds of the 400-odd rules expected to come from Dodd-Frank have yet to be finalized. That includes big, potentially game-changing rules governing inappropriate risk taking and international subsidiaries of American banks, and how exactly we’ll go about regulating derivatives. In the next year or so, the vast majority of these rules will be launched down the rule-making gauntlet. The necessary first step in assuring that they come out the other end as strong as they should be—or that they come out the other end at all—is to understand the challenges they’ll face along the way.
The basic rules of rule making
The rule-making process is governed by the Administrative Procedure Act, which became law in 1946, in response to the New Deal-era expansion of the federal bureaucracy. In the late 1930s and early ’40s, all the new agencies were dancing to their own beat; the APA established a system-wide metronome. Since then, a handful of other laws have been passed, including the Regulatory Flexibility Act, Paperwork Reduction Act, Government in the Sunshine Act, and Congressional Review Act, which also govern parts of the process; but for the most part the APA is the foundation.
Every stage in the rule-making process is guided by the APA. It begins the moment a law is passed and shunted off to the regulatory agency that will oversee its implementation. Once it’s in the agency, the APA governs the activities of a team of rule makers—researchers, analysts, economists, and lawyers—who do a bunch of fact gathering, perform studies, and hold a ton of informational meetings in an attempt to get a handle on how best to abide by the intention of the law and how to apply that intention to real life. Since big laws like Obamacare and Dodd-Frank deal with complex issues, Congress often makes the statutes deliberately vague, deferring to rule makers’ technical expertise and policy decisions, and giving them a significant amount of authority on how to interpret a law. All of that interpretation generally happens in the very beginning of the rule-making process, which is called the Notice of Proposed Rulemaking, or, in the acronymic parlance of the federal bureaucracy, NPRM.
After spending months and months in the NPRM process, the agency eventually publishes a proposed rule, on which, the APA stipulates, the public gets an “adequate” amount of time to comment. Usually, that’s about sixty days, but it can be shorter or longer, depending on how complex or controversial a rule is. After that, the rule makers revise the rule again, taking into account concerns raised by regulated industries and the public’s comment letters.
From there, executive branch agencies like the Food and Drug Administration and the Environmental Protection Agency send their rules to the White House Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA), which reviews the projected costs and benefits of those agencies’ major new rules, as well as the suggestions of other agencies, before the final rule is published and implemented. At independent agencies like the Securities and Exchange Commission (SEC) and the CFTC, a bipartisan panel of commissioners publicly debates and votes on the rule—a process that often results in further revisions and compromises.
Like the rest of us, rule makers use the Track Changes feature in Microsoft Word, which assigns a different color font to each contributor. By the time a complex rule has made it through this whole process, it is “lit up like a Christmas tree,” said Leland Beck, who worked for various agencies for thirty years and practiced administrative law. “A rule becomes a decision on all the comments and revisions and compromises between agencies and all the individuals who got their hands on it.” Eventually the agency publishes a final rule, which is implemented and enforced. Voilá .
Or that’s how it’s supposed to work. But like many things in Washington, that’s just half the story. The rule-making process is actually a much messier, much more cacophonous affair, dictated to a large degree by lawmakers who voted against the law to begin with, and by industry groups who would often prefer that no rules be implemented at all. In the last decade, conservative members of Congress have built ever-higher hurdles that agencies must clear, and done so while cutting their staff and budgets.
Meanwhile, since the passage of Dodd-Frank, financial industry groups have also sabotaged parts of the APA’s carefully plodding process, overwhelming rule makers with biased information and fear tactics and threatening to sue the agencies over every perceived infraction. That’s a big reason why agencies have missed so many of their deadlines for implementing Dodd-Frank—a subtlety reporters frequently miss. (See “Why Agencies Are Always Missing Their Deadlines.”)
“It’s just this constant, never-ending onslaught,” a former SEC staffer told me. “You’re doing battle every day.”
The Gauntlet, Stage 1: Asymmetric warfare in rule making
Public interest and consumer advocates tend to describe the fight over the rules of Dodd-Frank in martial terms. “It’s like World War II,” said Dennis Kelleher, the president and CEO of the nonprofit Better Markets. “There’s the Pacific theater, the Atlantic, the European, the African theater—we’re fighting on all fronts.” Former Senator Ted Kaufman, an outspoken advocate for financial reform, says it’s “more like guerrilla warfare.” The reformers are trying “to make it at the margins, but they’re totally outgunned,” he said.
The financial industry certainly has a spectacularly enormous arsenal. Since the passage of Dodd-Frank, the industry has spent an estimated $1.5 billion on registered lobbyists alone—a number that most dismiss as comically low, as it doesn’t take into account the industry’s much more influential allies and proxies, including a battalion of powerful trade groups, like the U.S. Chamber of Commerce, Business Roundtable, and American Bankers Association. It also doesn’t take into account the public relations firms and think tanks, or the silos of campaign cash the industry has dumped into lawmakers’ reelect-
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