Trouble Ahead for SEC, CFTC Rulemaking Under Reform Act as Group Urges Oversight

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A nonpartisan research group Dec. 15 urged key lawmakers to hold prompt oversight hearings on implementation of the financial reform legislation, charging that the rulemaking process used by the Securities and Exchange Commission, the Commodity Futures Trading Commission, and other regulators is “seriously flawed.”

“Rather than using a prudent deliberative process, sweeping reforms are being quickly pushed forward without providing adequate time for meaningful fact-finding and dialogue,” said the Committee on Capital Markets Regulation, whose members come from the top echelons of business, finance, law, and academia. “We believe that the current rulemaking process is sacrificing quality and fairness for apparent speed, risking lengthy court challenges and poor rules that will damage our financial system and hinder economic recovery.”

CCMR's letter was sent to Sen. Christopher Dodd (D-Conn.), the outgoing chairman of the Senate Banking Committee, and ranking member Sen. Richard Shelby (R-Ala.) The letter also was sent to Rep. Barney Frank (D-Mass.), the outgoing chairman of the House Financial Services Committee, and ranking member Rep. Spencer Bachus (R-Ala.), who will assume chairmanship of the committee in January.

Observers told BNA that CCMR's concerns are echoed by some on Capitol Hill, spelling rulemaking impediments ahead for the SEC and CFTC.

Rulemaking Pace.

The SEC has the biggest burden under the Dodd-Frank Wall Street Reform and Consumer Protection Act, with responsibility for over 100 rulemakings and 20 studies. In its letter, CCMR commented that the statute requires an almost “complete rewrite” of current regulations for U.S. financial markets, and sets deadlines that are “overly ambitious and demanding.”

The SEC--which issued fewer than 10 new rules a year in 2005 and 2006--now must write approximately 60 new rules by July 2011, the group said. The CFTC--which averaged about 11 new rules in the two years before the financial crisis--now must issue nearly 40 rules by July 2011.

CCMR observed that in the two years before the crisis, it took the SEC 524 days to adopt a rule from the proposal stage to finalization. Based on what the agency has proposed so far under Dodd-Frank, the SEC has an average of only about 200 days to finalize a rule. Although the reform statute provides more time for the CFTC to adopt new rules--238 days compared to the agency's pre-crisis average of 109 days--“it has never before been tasked with writing so many complex rules.”

Under the Administrative Procedure Act, agency rulemaking must be “transparent and responsive to the public and affected parties,” the group continued. Both the SEC and CFTC allowed, in the two years before the crisis, an average of more than 60 days and longer for the public to comment on new rules. However, three months into the passage of Dodd-Frank, the agencies are allowing, on average, only 30 days for comment.

Moreover, the CCMR letter said, providing meaningful comment has become even more difficult with the joint rulemaking and agency coordination required under Dodd-Frank. The group also charged that coordination has been “sorely lacking,” citing conflicting rules by the SEC, the Federal Deposit Insurance Corporation, and others in the asset-backed securities area, and conflicting rules by the SEC and CFTC with respect to over-the-counter derivatives.

The letter was signed by CCMR co-chairs R. Glenn Hubbard and John L. Thornton, and director Hal S. Scott.

Congressional Concerns.

Meanwhile, Bachus and Rep. Frank Lucas (R-Okla.), the chairman-elect of the House Agriculture Committee, Dec. 16 sent letters to SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler raising concerns about the speed and direction of swaps rulemaking. On the same day, Sen. Blanche Lincoln (D-Ark.), the outgoing chairman of the Senate Agriculture Committee, wrote Gensler warning that the CFTC must set aggregate position limits for swaps “as appropriate.”

Daniel Crowley, a partner in K&L Gates LLP, Washington, and a former senior staffer to the House Republican leadership, observed that there has been a “bipartisan chorus of concern coming from Capitol Hill” on the speed of rulemaking under Dodd-Frank, particularly with respect to the CFTC. Not only is the agency acting quickly, its rules potentially have significant consequences across a broad swarth of the economy, he said.

“We've never in history seen this many simultaneous rulemakings with respect to financial services,” Crowley said. “It's an unprecedented environment, and a paradigm shift.” In addition, regulators have yet to make many of the essential policy determinations under the reform statute. In this new environment, the linear policymaking of the past--in which Congress passed the law and regulators implemented it--has become “circular,” Crowley said. “So you're already seeing an unprecedented effort by Congress to intervene in the rulemaking process.”

Legal Challenge.

Crowley added that the SEC and CFTC thus far have been “reluctant to exercise their exemptive authority” conferred by Dodd-Frank. “The failure to exercise exemptive authority where warranted is the kind of abuse of discretion that litigants will seek court action on.” Add to the mix the hectic rulemaking environment under which both agencies currently operate--where there might not be full consideration of the effect of rules on each other and with those issued by other regulators--and there is a “real risk” that courts could find agency abuse of discretion, he said.

Former SEC commissioner Joseph Grundfest, now a Stanford University law professor, agreed that the rulemaking process under Dodd-Frank could be “longer and messier than many people, including members of Congress, realize.”

Given the APA's cost-benefit analysis and other requirements, the chances are high that rules adopted by the regulators under Dodd-Frank will be legally challenged by aggrieved parties, Grundfest said. “The question then becomes whether the challenged rules are stayed prior to resolution of the appeal, and whether the rules are upheld as adopted or remanded for further proceedings,” he said. “Thus, simply observing that the agencies are required to adopt rules within a year of Dodd-Frank's enactment does not mean that those rules will take effect a year from Dodd-Frank's enactment.”

By Yin Wilczek

CCMR's letter is available at the group's website, at

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