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.
Scenarios like that can be deflating for reformers, but there have been wins, too. The CFPB remains a major success for consumer and investor advocates, and the SEC’s rule on whistleblowers appears to have emerged fairly intact. The CFTC’s brand-new Swap Data Repositories, which were designed to collect data about over-the-counter derivatives transactions, are also up and running, with the potential to shed some much-needed light on that shady industry. Whether the new repositories will be useful to regulators, or whether they will be undermined by a future lawsuit or lack of funding, is still unclear.
In some arenas, most notably the D.C. Circuit’s activist bench, reformers have faced crushing defeats. Yet all is not lost. In a case this past December, the U.S. District Court for D.C., a notch below the D.C. Circuit, handed the industry its first loss in years, deciding in favor of the CFTC’s rule requiring registration of mutual funds that engage in derivatives trading. It also marked the end of a five-case winning streak in lead counsel Eugene Scalia’s battle against agency rules. Judge Beryl A. Howell, an Obama appointee, decided against the U.S. Chamber of Commerce and the Investment Company Institute. (Both are now appealing that case to the D.C. Circuit.)
The Dodd-Frank rules that, against all odds, have emerged relatively intact underscore an important point: those who favor strong regulations are not without shields to protect rules against the many whirling weapons along the regulatory gauntlet. But in order to be effective, of course, those shields have to be used.
First and foremost, the White House has to get more involved in defending its own legislative achievements from being gutted in the rule-making process. In addition to appointing more judges to the D.C. Circuit (and that’s no guarantee of success; the judge who decided against the CFTC’s position limits rule was a Democratic appointee), the administration should deploy its best Justice Department lawyers to defend against the industry’s court attacks on Dodd-Frank rules. It should aggressively push to fill vacancies at the agencies with pro-regulation commissioners and other agency heads, and fight harder for bigger agency budgets. And the president himself should shine a spotlight on the process, and support the work rule makers do by paying personal visits to the agencies.
Second, the administration and its allies in Congress must address as quickly as possible the asymmetry of information in the agencies. In order to do their jobs, regulators must be armed with objective information to offset the biased or incomplete reports they receive from industry. This is particularly important for a small, underfunded agency like the CFTC, which doesn’t have the stable of researchers and economists employed by some of its brethren, including the Fed, the CFPB, and the FDIC.
The good news is that Dodd-Frank mandated the creation of a new office whose mission, in part, is to correct this imbalance of information. Housed in the Treasury and funded by bank fees, the new Office of Financial Research was conceived as a kind of giant weather station monitoring the financial industry in order to detect potential “storms” before they arrive. To that end, it’s statutorily authorized to gather, with subpoena power if necessary, granular-level data from financial institutions, including information about banks’ trading partners, positions, and transactions, and to make that data available to other regulatory agencies. The only question is whether the OFC will have the political backing it needs to fulfill those ends.
As of now, it has a very small budget and an advisory board heavily weighted with industry insiders. It’s also facing extraordinary political opposition, mostly from congressional Republicans, who have called for nothing less than its immediate abolishment, arguing that it compromises data security and encroaches on the private sector. Making sure that the OFC survives and overcomes any legal challenges to its ability to share key information with regulators should be a top agenda item for congressional Democrats and the new treasury secretary, Jacob Lew.
Third, reformers and reform-minded analysts, lawyers, and academics need to do a better job of making their voices heard in the agencies. The Administrative Procedure Act, which governs the rule-making process, painstakingly enshrines public commentary, but as of now the vast majority of the substantive comments are coming from industry groups and their proxies, including bought-and-paid-for think tanks, trade groups, and consulting firms, which have the time and legal expertise to dedicate to such things. Launching a counterinsurgency in kind will obviously require a pretty chunk of change. Perhaps it’s a place where foundations can make a real difference. If more individuals and groups weighed in with smart ideas and substantive research to counter industry, it could help strengthen the rule makers’ hands.
Rule makers read and make note of every comment letter, and those letters have a cumulative effect of pushing policy, staff members at the SEC and the CFTC told me. That’s particularly true in instances where a rule-making team believes the best public policy differs from what industry is advocating. “To the extent that there was already an argument for a given position, a public letter will give a team support. There’s a sense of ‘See? Other people think this too,’ ” a former SEC staffer told me.
Reform groups like Americans for Financial Reform, Better Markets, and Public Citizen have thus far done a heroic job writing substantive, evidence-based letters of concern and organizing public letter-writing campaigns. Groups like Occupy the SEC, which is run by people with direct experience in the financial industry, have also submitted long, well-informed reports to the agencies and engaged with rule makers personally. Those voices make a big difference. But they go only part of the way toward countering the overwhelming influence that industry has enjoyed.
Fourth, what’s needed is the vigilance of the wider public. That may seem unreasonable to expect—who has the time or inclination to follow the grammatical arcana of rule making as it moves through the process? But in an age of Wikipedia, when millions of people write and edit tomes on obscure and complex issues on a daily basis, there’s no reason in theory why more Americans couldn’t weigh in on regulations that most of them clearly favor. Nearly 75 percent of voters, Republicans and Democrats alike, support “tougher” rules and enforcement for Wall Street financial institutions, according to a 2012 poll commissioned by a coalition of consumer, reform, and public interest groups.
Those same citizens should also prod their members of Congress. The political scientist Susan Webb Yackee has found that the attention of lawmakers is one of the primary factors that can help curb industry influence in the regulatory process. In the stew of congressional power struggles, and with the financial industry furiously underwriting lawmakers’ reelection campaigns, members of Congress have a variety of reasons not to stick their necks out. Their constituents should insist that they do.
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