COLUMN-Two paths to failure on Dodd-Frank

February 14, 2011

capitol bldg 2 RTXX2LO_Comp.jpg(Scott McCleskey is a managing editor for the ThomsonReuters Governance, Risk and Compliance unit. The views expressed are his own)

By Scott McCleskey

NEW YORK, Feb. 14 (Complinet) – With all the chest-thumping about U.S. financial reform last year, you would suppose that the regulatory authorities responsible for implementing the provisions of the Dodd-Frank Act would now have the political wind at their back.

This is particularly the case given the tight deadline for most of the provisions — on or before the July 21 anniversary of the Act’s enactment. You would be wrong. Both sides of the aisle in Congress have taken or threatened steps which only serve to undermine the process of regulatory reform and leave the market with all the costs and none of the benefits of reform.

The regulatory agencies tasked with implementing Dodd-Frank have in the form of Congress a Boss from Hell — one who makes unrealistic promises with aggressive deadlines which make the boss look good but which are impossible to meet, and who then cuts your budget in the middle of it all.

It is here that the political nature of regulatory reform becomes apparent: acts that make great sound bites and appeal to the electorate (or the lobbyists) are fine for those who don’t have to carry through on the promises. The danger of all the posturing and maneuvering on Capitol Hill is that it leaves us only with bad rules, badly enforced. In true bipartisan spirit, each side has created its own separate roadblock to effective reform.


First up are those who pushed reform, chiefly the Democratic Party. In light of the wrestling match that broke out in negotiating important parts of the Dodd Frank reforms, it is understandable that the Democrats would anticipate attempts to slow down or deep-freeze the actual drafting of regulations to implement the law. So, it was not unreasonable for them to include deadlines for the regulators to produce final rules. But these deadlines should not be capricious or unduly aggressive, and should reflect both the complex nature of the provisions and the fact that they would all need to be done simultaneously.

The deadlines placed upon the regulators have been arbitrary and brutishly short, with most provisions requiring implementation within a year of the Act’s passage. This is a crushing burden to the regulators, who typically consult with the public and affected parties as they draft regulations, assess their costs and benefits, and attempt to identify any unintended consequences which might arise due to their implementation.

It also does no favors to the industry, where firms have to identify which provisions apply to them, how they will be interpreted as the actual language of the rules takes shape, and then establish the appropriate procedures and controls for each and every one of the rules (in addition to measures emerging from other jurisdictions).

The upshot is that regulators are now forced to rush the process of creating effective regulation. We can expect at least some of the ensuing regulations to miss entire areas of concern, to create costly and unnecessary overlaps, or to leave loopholes that invite abuse. There’s a reason why factories don’t try to increase production just by speeding up the conveyor belt.


Then there are the anti-reform snipers who haven’t heard that the war is over. Emboldened by the Republican seizure of the House and a beachhead in the Senate, those who never wanted reform now threaten to starve it into submission by cutting off the funding of those regulatory agencies whose budgets must receive Congressional approval — specifically, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Some lawmakers are open about their aims to cut reform off with budget cuts, others paint it simply as part of the larger effort to reduce runaway spending. But cutting off funding across the board without regard to specific priorities is intellectually lazy: It’s hard work to decide who needs funding the most and balance the benefits versus the cost. It is also misleading to challenge reform on the grounds that some or all of it may “kill jobs.” Anyone who takes this approach has a very short memory indeed, since the biggest job-killer of them all is a financial collapse of the kind the reforms are meant to prevent.

The fact is that the law is on the books, whether the anti-reformists like it or not. Regulatory reform is going to happen one way or the other, and so the question is whether it will be implemented well or poorly. Any politician who supports cutting regulatory funding in the midst of reform forfeits their right to criticize regulators in the future as being ineffective, or to oppose future regulation on the ground that “all we need to do is enforce the existing laws.”

By working to leave regulators without the staff to draft the rules well, and without the resources to interpret and enforce the rules, the anti-reformists promise to deliver badly written rules just as surely as the reformists promise the same result by rushing the process.


And so we have two bad ideas, one led by each party, which are working together to create a regulatory swamp where reform once stood. But the answer lies in that greatest of all political talents: compromise. The Republicans want to cut off regulatory reform but know they can’t, given that the Democrats hold most of the seats in the Senate and the only seat in the Oval Office. Realistically, the best tactic for them is to slow the process down, both to provide regulators the opportunity to do regulation right and to give the GOP a chance to take control after the 2012 elections. The Democrats want to ensure that the reforms happen as soon as possible, but should be willing to push back the deadlines in order to get a decent set of regulations. They also need the agencies to be adequately funded.

The solution cannot have escaped the attention of the party leaders. Trade a sizeable budget increase in return for extending the deadlines. That’s a solution both parties, the regulators, and the industry can live with.

((This article first appeared in Complinet ( Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community. Scott McCleskey is managing editor, North America, at Complinet and is the author of “When Free Markets Fail: Saving the Market When It Can’t Save Itself.”))

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