Friday, November 11, 2011

GAO Report on Federal Regulatory Process Sees Key Role for FSOC, Notes SEC-CFTC Coordination Efforts

A GAO report on the federal regulatory process recommend that the Financial Stability Oversight Council, of which the SEC and CFTC are members, work with the federal financial regulators to establish formal coordination policies for the implementation of Dodd-Frank. FSOC should clarify issues around when coordination should occur and the process that will be used to solicit and address comments. Ancillary to its main coordinating role, FSOC should direct the Office of Financial Research to work with its members to identify and collect the data necessary to assess the impact of the Dodd-Frank regulations on, among other things, the stability, efficiency, and competitiveness of the U.S. financial markets.

Given its membership and charge to help facilitate coordination among its member agencies, reasoned the GAO, FSOC is positioned to work with the federal financial regulatory agencies to establish compatible policies that would guide and facilitate interagency coordination among its members throughout the course of Dodd-Frank Act rulemakings

Although federal financial regulators informally coordinated with each other on some of the final rules reviewed for the report, noted the GAO, most of the regulators lacked written policies and procedures to facilitate interagency coordination. But the GAO noted that the SEC and CFTC concluded a memorandum of understanding establishing a permanent regulatory liaison between them and containing procedures to facilitate the discussion and coordination of regulatory action on issues of common regulatory interest, such as novel derivative products.

While endorsing formal policies regarding interagency collaboration, in a comment letter to the GAO the SEC cautioned that these efforts should fully respect the independence of the respective member agencies of FSOC regarding the substance of the rules for which they are responsible. FSOC was not designed to be a super regulator, noted the SEC, but was created to provide a venue and mechanism for identifying and addressing potentially systemic risks that often flow across multiple regulatory regimes.

The SEC also said that it looked forward to working more closely with the Office of Financial Research to obtain more data and analytical support for purposes of evaluating the impact of the Commission’s Dodd-Frank regulations

The GAO also urged federal financial regulators to better ensure that the specific practices in the OMB’s regulatory analysis guidance are more fully incorporated into their rulemaking policies and consistently applied. In addition, in conducting retrospective reviews of regulations, regulators should develop plans that determine how they will measure the impact of Dodd-Frank Act regulations, for example, determining how and when to collect, analyze, and report needed data. By planning ahead, said GAO, such as what the SEC appears to be doing in its retrospective review release, an agency can identify not only potential data collection challenges but also alternative data sources or data collection strategies for conducting the reviews.

Section 1573(a) of the Department of Defense and Full-Year Continuing Appropriations Act of 2011 amended the Dodd-Frank Act and directed the GAO to conduct an annual study of financial services regulations. Specifically, the GAO was directed to analyze the impact of regulations on the financial marketplace, including whether relevant federal agencies are applying sound benefit-cost analysis in promulgating rules; efforts to avoid duplicative or conflicting rulemakings, information requests, and examinations. The GAO said that the focus of the review is limited to the financial regulations promulgated pursuant to the Dodd-Frank Act that were effective as of July 21, 2011.

In its letter to FSOC, signed by SEC Chairman Mary Schapiro, the SEC noted the challenges of analyzing the economic impact of financial regulations, but recognized the importance of such analysis as part of the rulemaking process. The SEC also noted that it is not subject to Executive Order 12866 and the accompanying OMB guidance, although the Commission agreed to look for opportunities to more fully incorporate the guidance into its rulemaking process

The National Securities Market Improvement Act of 1996 requires the SEC, when engaged in rulemaking that requires it, to consider or determine whether an action is necessary or appropriate to the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation during the rulemaking process. In addition, Section 23(a)(2) of the Securities Exchange Act requires the SEC to consider the impact that any rule promulgated under the Act would have on competition. This provision states that a rule should not be adopted if it would impose a burden on competition that is not necessary or appropriate to the Act’s purposes.
Section 610 of RFA requires independent and other regulatory agencies to review within ten years of publication any of their rules that have a significant economic impact on a substantial number of small entities. The review’s purpose is to determine whether such rules should be maintained, amended, or rescinded to minimize their impact on small entities. The SEC has conducted Section 610 reviews. As a matter of policy, the SEC reviews all final rules that it publishes for notice and comment to assess their utility and continued compliance with RFA.

Federal financial regulators also may review their Dodd-Frank Act regulations in response to the recently issued Executive Order 13579. The order notes that independent regulatory agencies should consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome. It further notes that each agency should develop and release to the public a plan for periodically reviewing its existing significant regulations. Although federal financial regulators are not required to follow E.O. 13579, the CFTC and SEC are developing plans to conduct retrospective reviews in light of the order.

As part of its ongoing efforts to update its regulations and in light of E.O. 13579, the SEC issued a release in September 2011requesting public comments on the development of a plan for retrospective review of its existing significant rules. Specifically, the SEC asked what factors it should consider in selecting and prioritizing rules for review and how frequently it should conduct the reviews. SEC also included questions on the availability of data it would need and processes for gathering relevant data and analyses.

In its comment letter to GAO, the SEC noted the creation of the Division of Risk, Strategy and Financial Innovation to enhance the Commission’s economic analysis capabilities in the rulemaking process. Chairman Schapiro recently asked the SEC staff to explore ways to improve the process for integrating economic analysis into the SEC’s decision making throughout the course of a rulemaking. As part of that effort, Risk Fin has been considering best practices for conducting sound economic analyses in rulemaking.