Wednesday, October 25, 2017
Following up on the publication of its first banking policy report in June, the U.S. Treasury released two more reports on Capital Markets and Asset Management. From the tone of all the reports, it’s clear that Treasury intends to lead the regulatory agencies of the executive branch into a new era of consultative rule-making, with the industry taking a more active role than it has over the last several years. It’s also clear that the Treasury will move to reverse the impact of the Dodd-Frank Act, not only through an attempt at legislative repeal, but initially by unwinding the cocoon of new regulations that the Act imposed on financial firms.
In a comment reminiscent of the Reagan-era privatization movement, the Capital Markets Report said that, “It is critical that agencies conduct periodic reviews of existing regulations.” Regulators should “modify, streamline, expand or repeal” rules that have become “outmoded, ineffective, insufficient, or excessively burdensome.” The Report also criticized more than a dozen mechanisms through which the regulators “may publicly express new views that have the effect of de facto regulation.”
Treasury recommends that the CFTC and the SEC avoid imposing new requirements by no-action letter, interpretation, or other form of guidance and consider adopting Office of Management and Budget’s Final Bulletin for Agency Good Guidance Practices [issued in 2007]. Treasury also recommends that the CFTC and the SEC take steps to ensure that guidance is not being used excessively or unjustifiably to make substantive changes to rules without going through the notice and comment process. Treasury further recommends that the CFTC and the SEC review existing guidance and revisit any guidance that has caused market confusion or compliance challenges. [emphasis added] p.183
Greater participation by trade groups and member firms
During outreach meetings, Treasury officials were sensitized to the frustrations of financial firms in dealing with self-regulatory bodies. According to the Report, SROs have increased the number of non-members in their boards and committees, while also becoming more “opaque, arbitrary, and prescriptive.” As a result, “SROs have become less like an industry-led self-regulator and more like a government regulator but without due process protections.” Treasury wishes to restore the “traditional connection with markets and their members.” P.185
Controversial decisions by regulators may be scrutinized in considerable detail by affected firms. To date, the courts have provided the only recourse for challenges. The Report cited favorably a decision by the D.C. Circuit that the SEC’s approval of a rule change by the Options Clearing Corporation failed to employ “the kind of reasoned decision-making” that the regulatory statutes require. It would not be surprising to see Treasury siding with the industry in challenging existing rules of the regulatory agencies.
Transparency to be imposed on regulators
In the United States, the Report recommends that the registered national securities exchanges and their self-regulatory organizations “adopt and publicly release an action plan to review and update [their] rules, guidance, and procedures on a periodic basis.” Overseas, Treasury has similar goals for improving the processes for developing significant standards:
To improve transparency and accountability, the SSBs [Standard Setting Bodies] should appropriately consider and account for the views and concerns of external stakeholders, including market participants, self-regulatory organizations, and other interested parties. … Treasury recommends increasing the number and timeliness of external stakeholder consultation and publicizing the schedule of major international meetings. [emphasis added] p.191
Regulatory cooperation to be preceded by industry review
The U.S. Treasury negotiates with India and the European Union; as well as with Mexico and Canada within the context of the NAFTA Financial Services Committee. In those negotiations, U.S. global banks will be at a particular advantage to the extent that the business units of their foreign branches are seen to be solid citizens of their diverse but still-local trading, settlement and payment systems. The advantage will ascribe in that these globally active banks will not wish to see quasi-import duties – in any form – imposed on their financial services units. If foreign banks are disadvantaged in new U.S. rules, the U.S. global banks would expect counterstrikes by the national regulators in their most attractive markets in the form, often enough, of newly expanded rules on the disclosure of customers’ activities.
Those global firms, Treasury would no doubt agree, are the businesses most aware of the asymetric impact of new rules, especially on an ROE basis, both firm and financial-system wide. In presentation of this policy stance, Treasury established the importance of industry dialog as a pre-requisite to the imposition of new global rules:
Treasury recommends that U.S. regulators and Treasury sustain and develop technical level dialogues with key partners, informed by prior outreach to industry, to address conflicting or duplicative regulation. Treasury also recommends that U.S. regulators seek to reach outcomes-based, non-discriminatory substituted compliance arrangements with other regulators or supervisors with the goal of mitigating the effects of regulatory redundancy and conflict when it is justified by the quality of foreign regulation, supervision, and enforcement regimes, paying due respect to the U.S. regulatory regime. [emphasis added] p.191
On a global basis, the Report took aim at inefficient international standards by recommending a reduction of “conflicting cross-sectoral standards.”
Good policy development should consider the interactions of regulation and also the proper alignment of incentives. Regulatory approaches that have worked in one context, such as a country or sector, should not be inappropriately applied elsewhere. p.192