How does U.S. financial regulation work?

September 12, 2013

If you’ve ever wondered how the process of financial regulation in the U.S. works, I’ve just found the article for you!

I highly recommend this feature piece – ‘He Who Makes The Rules’ – by Haley Sweetland Edwards of the Washington Monthly published back in March. The main character of the article is CFTC commissioner Bart Chilton as he meets with people at the commodities exchanges to establish ‘appropriate’ position limits for derivatives as mandated by Dodd-Frank.

Hmmm. What’s the legislative intent of ‘appropriate’? What say you, lawyers?

The article, however, covers far more than just one moment of regulatory contention. Over the course of the 10,000 words Edwards traverses the multiple stages through which the word of law must pass before being implemented on the ground in everyday practice. The article gives a very nice snapshot of the process that shapes the way a law will have influence.

Edwards writes to point out that this regulatory process is political and not boring:

As of now, there’s no guarantee that either Obamacare or Dodd-Frank will be made into rules that actually do what lawmakers intended. That’s partly because the rule-making process is a dangerous place for a law to go. We might imagine it as a fairly boring assembly line—a series of gray-faced bureaucrats diligently stamping laws into rules—but in reality, it’s more of a treacherous, whirling-hatchet-lined gauntlet. There are three main areas on this gauntlet where a rule can be sliced, diced, gouged, or otherwise weakened beyond recognition.

She notes that while the high-drama of law-making gets amply reported on by the media, very little attention is devoted to the rule-making that comes afterwards:

That kind of stuff is the Washington journalist’s bread and butter: the artful, insidious process by which a bill becomes a law. […] But fast-forward a couple of years, and as the fate of those very same laws is being determined in the rule-making process we’ve found ourselves distracted by new shiny objects, like women in combat and how Pennsylvania will allocate its electoral votes in 2016.

I often wonder whether social scientific researchers could fill this hole by tracing the political intrigues of financial rule-making. Maybe it’s not too late to start. According to the law firm Davis Polk, as of late-July, a full three years since Dodd-Frank’s passage, rule-making had already finalized an estimated 13,789 pages of documents, about 28 copies of Tolstoy’s War & Peace. But get this -the process is only 39% complete…!

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