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the next act: after congress passes the financial reform package

June 1, 2010

In the early 1990s as part of his monumental reform efforts for Peru, the international economist Hernando de Soto conferred with a federal agency in Washington DC on new rulemaking procedures he wanted to institute for his country. I was one of the people invited to the discussions. With all the jejune cockiness of a young professor, I proceeded to explain that he might not want to emulate American rulemaking procedures. Far from ensuring that statutes would be applied in a fully informed, expert manner, these procedures can often turn into expensive, slow quagmires in which industry and other interest groups are able to secure advantages they did not gain in Congress and losers were sometimes then still able to get courts to strike down all this work through the process of judicial review. Perhaps Mr. de Soto might want to avoid this result? I did not really notice the kindly smile spreading across de Soto’s face but when he had finished listening to me patiently he said, “but this is precisely the point! We want to stop the process in Peru. Every time a bureaucrat wakes up there he issues a new rule, and our government is bogged down in such bureaucracy!”

This lesson leaps to mind as I contemplate the next phase after Congress enacts the final financial reform bill in early July and the President gives it his signature. After the fanfare the media and the public will likely turn their attention elsewhere, reasonably assuming that the great work of reform is done. Au contraire, it will be in the arcane forums of regulatory notice and comment procedure that we will see some of the most important advances or, more likely, setbacks of the entire reform process. As Joe Adler in this morning’s American Banker reports (proprietary content, unfortunately), the financial regulators, as well as new ones created by the legislation, will be required to develop well over 100 rules and they will be required to develop many of these rules very rapidly. These rules will address such critical matters as systemic risk, consumer protection, emergency Fed lending authority, the Volcker rule, risk retention for institutions that securitize loans, concentration limits for large firms, interchange fees for debit card issuers, and credit reporting and resolution plans for large financial institutions. The average reader might be forgiven for yawning. Surely, one might ask, the proper parameters will have been set by Congress? Well yes and no: nowhere is the old adage more true than in financial regulation: the devil is in the details. And rulemaking, even with the best of intentions, can sometimes bring a reform process to a halt.

And it is here that the industry is most adept at lobbying. While technically open, the notice and comment procedures for rulemaking are much more difficult for laypeople and the media to track and far less exciting to monitor and influence than partisan votes in Congress. But banks and brokers understand their importance and they are well placed to redirect enormous resources. So the results are quite likely to skew in their favor.

This is not all bad. Of course the industry should have influence over the way legislation is applied to it, and we surely want regulators to be properly informed before they make regulations. But consumers and the media will take this process for granted at their peril. It would take the strongest of regulators to be able to ensure that less well represented interests are properly safeguarded, and I don’t think we have yet left the financial regulators in so strong a position. Indeed, some of the new regulators, including the newly-combined federal thrift and bank agency, consumer protection agency and systemic risk council, have not yet even been created!

  1. The most obvious example of your point is the new Consumer Financial Protection Bureau/Agency. Leaving aside everything else, the “law” that will govern its functionality is very unclear. The ABA Presidential Task Force on Financial Regulatory Reform (of which I am a member) sent a letter dated April 23, 2010 to Senators Dodd and Shelby regarding just the functionality of the CFPB/A. See link below. The April 23rd letter is very thoughtful, reflects the comments of highly experienced lawyers well-versed in Federal administrative law, and is sobering. In building up the administrative framework around the CPFB/A, the letter makes clear that its senior management will have a daunting task just adopting internal policies and procedures for conducting its business in a manner that will lead to predictable judicial deference to the administrative, enforcement, and rulemaking decisions that it will make.

  2. Marty,

    Thanks for your thoughtful comment and for posting a great, readable example of how important comment goes into the rulemaking process that ultimately makes legislation real.


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