Mercatus Scholar Hester Peirce Discusses the CFTC's Informal Methods of Regulation
Commentary by Bob Zwirb
Mercatus Scholar and former Congressional and SEC staff attorney Hester Peirce posted a working paper, titled "Regulating through the Back Door at the Commodity Futures Trading Commission," which argues that the informal mechanisms through which the CFTC regulates undermine public confidence and harm compliance.
Ms. Peirce argues that, when the CFTC utilizes "less formal and rigorous options" - including guidance documents, staff letters and settlement agreements - public confidence in the regulatory process is eroded, compliance efforts are hindered and the Administrative Procedure Act ("APA") might be violated. Through these "backdoor rulemaking" methods, an "ad hoc" approach to regulation is created that excludes certain viewpoints and undermines the CFTC's ability to regulate certain financial markets. The working paper identifies several problems with the CFTC's approach, including:
- a lack of procedural rigor, including the failure to conduct a cost-benefit analysis that would help to identify unintended consequences;
- unpredictable and insufficient transparency, forcing market participants to piece together guidance, letters and enforcement actions to interpret a regulation's impact; and
- a lack of deliberation that excludes the public and precludes the careful crafting of clear, unambiguous rules that avoid judicial and congressional scrutiny.
Ms. Peirce concludes that the APA's rulemaking guidelines, which include a notice-and-comment process, serve an important function by allowing all stakeholders to participate and be knowledgeable of the rules to which they are subject. Furthermore, a no-backdoor rulemaking policy allows Congress to use its oversight authority to monitor and develop guidelines for agencies to use.
See: "Regulating through the Back Door at the Commodity Futures Trading Commission," by Hester Peirce.
See also: Hester Peirce's Commentary, "Backdoor and Backroom Regulation."
Commentary
Hester Peirce's working paper focuses on a problem that is common to the CFTC's implementation of Dodd-Frank: the development and implementation of regulatory obligations "outside of the normal rulemaking process." This is best illustrated by the agency's issuance of cross-border "guidance," which recently survived a court challenge notwithstanding its prescriptive commands and profound impact on cross-border transactions.
Ms. Peirce's paper highlights two aspects of the problem that should be important to those who are interested in upholding the integrity of the administrative process. First, agencies like the CFTC can and often do use "backdoor rulemaking" methods to impose substantive policy, binding mandates and regulatory obligations. Binding mandates, as Ms. Peirce notes, "emerge from all corners of the agency, in many different forms," and this problem goes beyond the rules associated with Dodd-Frank.
Long before Dodd-Frank, the CFTC imposed new regulatory policy (through enforcement actions, for example). It did and continues to do so through settlements with respondents that should not, but, in practice do, have wider applicability. Ms. Peirce's paper highlights this practice, along with the use of other methods employed by the agency to establish de facto binding obligations on market participants, including staff letters, staff advisories and "guidance." These obligations require regulatees to know not only the statute and formal rules, but also, as former Commissioner Scott O'Malia observes, to scour the CFTC Web site to keep abreast of the hundreds of staff letters and other sources of informal rulemaking that apply to them.
Second, even where the CFTC does engage in formal rulemaking, it sometimes has undermined the purpose and intent of the APA rulemaking process through less-than-faithful and highly stylized implementation. This is best illustrated by the lack of meaningful analysis of costs and benefits in CFTC rulemaking during Chair Gensler's administration. Instead of engaging in the rigorous analysis of such expected costs and benefits, the agency seems to prefer, in the words of its own Inspector General, to take "a vague and minimalist approach" to fulfilling this statutory obligation (along with choosing methods of informal rulemaking to avoid it altogether). This is, of course, all aided and abetted, as Ms. Peirce points out, by "a combination of ossification [on the part of the agency] and willingness of courts to defer to a wide range of agency" actions.