David Zaring is assistant professor of legal studies at the Wharton School of Business at the University of Pennsylvania.
The slow rollout of the Dodd-Frank Act has left many frustrated, but in reality, much progress has been made in shaking up the financial industry.
To size up any new law, it’s best to examine the progress it has made in three stages: a congressional stage, where the law is passed; an agency stage, where the rules to are written; and judicial stage, in which the courts say whether the rules that the agencies wrote can actually be imposed on the industry.
The agency stage has been a case study in slow progress. But the good news for the government is that, in the early days of judicial review, it is holding up reasonably well. Perhaps the time spent fashioning and justifying the many rules required under Dodd-Frank is paying some dividends.
Dodd-Frank was pretty lengthy – 828 pages long, in fact. Many of those pages were intended to set an agenda for federal regulators, rather than to leave the regulating in the hands of Congress. The statute required agencies to promulgate 398 rules in the first instance and to conduct 87 studies, after which, presumably, more rules might be issued.
That is a lot of rules. Indeed, so far, 42 words of regulations have been promulgated for every word of text in Dodd-Frank Act – a number that will grow, as regulators have finished less than half of the rule-writing required by the statute, by the calculations of the law firm Davis Polk.
It is easy to make fun of all those words, and lawmakers and journalists often do. Moreover, one can imagine regulators drowning in a sea of their new responsibilities. They have failed to meet many of the rule-making deadlines Congress set for them when it passed the statute. Along the way, the regulators have been subjected to plenty of pressure by Wall Street, in the form of comments on rules, complaints in meetings, and repeated efforts to amend the law in Congress. The heavy opposition has contributed to a process that has run both long and late.
Important parts of the act – the Volcker Rule in particular – have not yet been put in place. The agencies writing the details of rule, which is intended to prevent banks from making speculative investments, have had difficulty devising a formula that captures the difference between that sort of speculation (forbidden under Dodd-Frank), and market-making and hedging (permitted).
But even this tough slog is showing signs of getting to the end. One federal regulator, the Commodity Futures Trading Commission, has essentially finished all of its Dodd-Frank rule-making obligations – and it is responsible for much of the new oversight of derivatives markets called for by the statute. The Securities and Exchange Commission has as well, although it missed a lot of statutory deadlines along the way. And parts of the act, including the Collins Amendment imposing capital requirements on financial conglomerates, are now in place with final rules.
Moreover, the time spent may be paying off when the agencies get taken to court. It is early days, but the government has won more cases related to its rules than it has lost.
As a rule of thumb, agencies can count on winning roughly two-thirds of the cases in which they defend their rules. But things have looked particularly dark for financial regulators, who have faced exceeding skepticism from the United States Court of Appeals for the District of Columbia Circuit, the most important regulatory court.
The D.C. circuit court has come close to imposing a cost-benefit analysis requirement on any financial regulation that is predictable, only because the Securities and Exchange Commission always loses when the court brings it up.
But there is some reason for consumers to take heart.
The D.C. circuit court has upheld the C.F.T.C. rules subjecting investment companies to derivatives trading rules. It turned away a challenge to new fees rules set by the S.E.C. on exchanges for market data, as well as, in the first instance, a challenge to the S.E.C.’s rule on resource extraction, requiring oil, gas, and mineral extraction companies to disclose payments made to American and foreign governments. Lower courts have upheld C.F.T.C. regulations of commodity pool operators, and the S.E.C.’s conflict minerals rule requiring the disclosure of the use of minerals extracted from certain war-torn countries.
It is not all rosy in the lower courts. Federal judges have rejected the C.F.T.C.’s position limit rule (which limits the size of a bet that could be made in various commodity markets) and, in the end, that resource extraction rule. Both of those cases are headed to the D.C. circuit court, which will then get a chance to re-evaluate how to apply its stringent cost-benefit analysis test to the architecture of Dodd-Frank.
On a broader front, two plaintiffs have argued that Dodd-Frank unconstitutionally empowers agencies to rule in the space of financial regulation by fiat and at whim. Those challenges, made by sophisticated conservative lawyers, arguing on behalf of, in one case, a small Texas state bank and three states, and in another, a small debt relief firm, have so far have been unable to pass the many timing and standing hurdles that would allow courts to address them. A related problem has bedeviled the Occupy Wall Street affiliate, Occupy the SEC, which is petitioned for the faster passage of more rules, to no avail.
It is too soon to declare victory on the regulatory efforts to implement Dodd-Frank in the courts but so far, I view the glass as half-full.
The early successes may pave the way for later ones, as no court is going to want to be known as the place where a major legislative initiative is strangled if it is doing so without company. And, for that matter, few courts will have the appetite to throw out hundreds of rules; in this sense, Dodd-Frank’s best judicial defense may lie in its comprehensiveness.
For now, American financial regulators are winning their fight to put through Dodd-Frank the way they think it must be done.