Washington watchdog raps regulators over Dodd-Frank rule-making

GAO: "the full impact of Dodd-Frank remains uncertain".

US financial services regulators have not properly evaluated the impact of rules they have proposed or introduced in implementing the Dodd-Frank Act, and should improve their co-ordination says a critical report from a congressional watchdog, the Government Accountability Office.

While the GAO found that those Dodd-Frank rules that have been enacted seem to have contributed to improvements in bank’s stability and ability to weather a future crisis, it said that the Department of the Treasury, Securities & Exchange Commission and Commodities Futures Trading Commission and others have not implemented previous recommendations on how they evaluate alternative approaches and have not been formal enough in the way they co-ordinate their activities.

The report re-iterates those recommendations, and while not adding any more, suggests a set of analyses of the impact that the rules are having on banks’ stability that could be used as a baseline for further analysis.

The GAO is careful to emphasis the on-going nature of the work  and the difficulty faced by the agencies: “The full impact of the Dodd-Frank Act remains uncertain,” it says. “Although federal agencies continue to implement the act through rulemakings, much work remains. For example, according to one estimate, regulators have finalised less than half of the total rules that may be needed to implement the act. Furthermore, sufficient time has not elapsed to measure the impact of those rules that are final and effective.”

Nonetheless, it pulls no punches: “… CFTC and SEC generally did not evaluate the benefits and costs of their proposed rules’ requirements compared to such alternative requirements. Instead, their rule proposals only presented the proposed set of requirements composing their rules and discussed the potential benefits and costs of their overall regulatory approaches.”

Critics of the regulators are likely to seize on criticisms of the extent to which the agencies preformed cost/benefit analysis on rules and alternatives. “The regulators generally did not quantitatively analyse the benefits and, to a lesser degree, costs of the rules we reviewed,” it says. “CFTC, the Federal Reserve, and SEC did not quantitatively analyse the benefits of these rules. CFTC and SEC monetised and quantified paperwork-related costs under PRA, but did not quantify any other costs.”

It also gives credit where it is due, acknowledging examples of good practice as well as bad.

“Two of the major rules we reviewed did not evaluate alternative approaches for key provisions in their rule proposals, but the final rule releases did evaluate alternatives considered by the agencies,” it says. “In implementing the Dodd-Frank provisions, the agencies exercised discretion in designing the various requirements that composed their rules, such as defining key terms and determining who will be subject to the regulations and how. In their rule proposals, CFTC and SEC identified alternative approaches for key provisions of their rule proposals.”

One example of this comes from the swaps market. The CFTC identified the consolidated tape approach –  used in the US securities markets to publicly report data on securities – as an alternative method for distributing swap transaction data in real time, while the SEC considered requiring potential whistleblowers to use in-house complaint and reporting procedures before they make a whistleblower submission to SEC. “However, CFTC and SEC generally did not evaluate the benefits and costs of their proposed rules’ requirements compared to such alternative requirements. Instead, their rule proposals only presented the proposed set of requirements composing their rules and discussed the potential benefits and costs of their overall regulatory approaches,” it concludes.

The agencies are often working in new areas and have little to guide them: they told the GOA that developing a baseline from which to assess the benefits and costs of what would have happened in the absence of a regulation was complicated by the lack of reliable data to quantify the benefits and costs. “CFTC staff told us that they were challenged because little public data were available about the opaque swaps market,” the report says. “Moreover, because the rule created a new regulatory regime, CFTC did not have the data needed for the analysis. Instead, CFTC had to rely on market participants to voluntarily provide it with proprietary data. CFTC staff said that they did receive some proprietary data but that they were incomplete.”

Co-ordination between agencies continues at an informal level, but that may not be adequate to eliminate the potential for differences in related rules. “Regulators have co-ordinated on 19 of the 54 substantive regulations that we reviewed, in some cases voluntarily co-ordinating their activities and also extending co-ordination internationally,” the GOA says. “According to agency staff, most inter-agency co-ordination during rulemaking largely was informal and conducted at the staff level. Differences in rules could remain after inter-agency co-ordination, because the rules reflected differences in factors such as regulatory jurisdiction or market or product type. While a few regulators have made progress on developing guidance for inter-agency co-ordination during rulemaking, most have not.”

“This report brings to light the fundamental issue of the day for regulatory reform: we are not taking the time to properly articulate the business case for the way in which we think banking should be supervised. Quite simply, the political intent can be achieved in many ways – and experts are required to make sense of how to meet many different objectives at once,” said PJ Di Giammarino, chief executive at regulatory impact specialist JWG. “The G20’s financial services regulatory reform programme has kicked off what is sure to be one of the largest technology and operations projects ever undertaken. We can’t afford to do it in the dark. Better targets, blueprints and road maps are needed urgently if we don’t want to fail. This won’t happen without better engagement models that include the banks at a meaningful level.”

The report – DODD-FRANK ACT: Agencies’ Efforts to Analyze and Coordinate Their Rules – is available at the GAO website