What's Behind the Endless Delays on New Rules for Wall Street?

National Journal

Paul Volcker was exasperated.

“How many times people told me six months ago, ‘It’ll be two weeks, Paul…. Looks like it’s right there.’ Doesn’t happen. Two months later, ‘Well, before the end of December. Well, before the end of January,’ ” the former Federal Reserve Board chairman said at an event hosted by the National Association for Business Economics this week.

Volcker was venting his frustration over the glacial pace with which a law bearing his name is being written. The so-called Volcker Rule, which would ban banks from making speculative trades with their own money, was passed as part of the landmark 2010 financial reform legislation to tighten oversight of Wall Street after the worst crisis since the Great Depression. The details of the Volcker Rule's implementation were supposed to be finalized by July 21, 2012, but the agencies responsible for writing the regulations are still not finished with their work. When the rule will be finalized is anyone's guess. Current Fed Chairman Ben Bernanke said in December that he expected the rule to be done “early in 2013,” but in congressional testimony last week he said there were ongoing issues of “finding agreement and closure among the different agencies” tasked with writing the rule.

The delays on the Volcker Rule's implementation are emblematic of the state of rule-making for the Dodd-Frank financial reform law. Just over one-third of the roughly 400 required rulemakings under the law have been finalized, according to law firm Davis Polk & Wardwell LLP, which tracks its implementation. What's the reason for the holdup?

In the case of the Volcker Rule, as Bernanke mentioned, the process is complicated. To finalize the implementation, five federal agencies must reach an agreement: the Fed, Office of the Comptroller of the Currency, Securities and Exchange Commission, Commodity Futures Trading Commission, and Federal Deposit Insurance Corporation. Not all Dodd-Frank rules require that level of coordination, but getting different agencies on the same page accounts for at least some of the delays.

Political divisions over financial regulatory issues are another reason the process is moving slowly. SEC has been evenly divided among Democrats and Republicans since the departure of former chairwoman Mary Schapiro in December. One of the five seats on the commission will remain empty until Congress approves someone to fill it, and getting nominees to financial agencies through Congress hasn't exactly been a walk in the park since the financial crisis. Peter Diamond, a Nobel laureate who withdrew from the process of being confirmed to serve on the Fed's board of governors out of frustration with the Republicans who were blocking his confirmation, is one example. Richard Cordray, the former Ohio attorney general Obama installed at the helm of the Consumer Financial Protection Bureau last year through a recess appointment, is another. Even many of Cordray's critics view him as qualified for the job but have resisted confirming him to the post over objections to the structure of the agency, which was created by the Dodd-Frank law.

There's the question of capacity at the agencies, too. “The timelines in Dodd-Frank were never realistic, in my opinion,” said Mark Calabria, director of financial regulation studies at the Cato Institute and a previous staffer on the Senate Banking Committee. Rules must be proposed and public comments—sometimes numbering in the tens of thousands—must be read and incorporated before the finalized version, which at agencies like SEC and CFTC requires the sign-off of a panel of commissioners that don't always see eye-to-eye, is released.

Congress is weighing in on top of those letters, too, by proposing legislative changes to the law. On Tuesday, for example, Sen. Richard Shelby, an Alabama Republican, introduced two bills “aimed at clarifying and streamlining the implementation of the 2010 Dodd-Frank financial regulation law,” according to a release put out by his office. “I think … some of these bills are meant as sort of super comment letters to regulators,” said Marcus Stanley, policy director of Americans for Financial Reform, a pro-reform group.

Then there's the threat of legal challenges. In 2011, the U.S. Court of Appeals for the D.C. Circuit invalidated the so-called “proxy access” rule written by SEC in Business Roundtable and Chamber of Commerce v. SEC. The court said SEC didn't conduct an adequate cost-benefit analysis before finalizing the rule (Mary Schapiro, then head of the agency, estimated that SEC had spent 21,000 staff hours drafting it). Advocates of financial reform worry that concerns over similar court rulings will hold up (and have held up) the rule-writing process.

Members of the financial services industry criticize regulators for being too slow to write the rules, complaining of the uncertainty that stems from knowing a rule is coming down the pike, but not knowing exactly how it will apply to their businesses. But they also share the blame for the sluggish pace of implementation, piling thousands of questions onto regulators and making clear they are prepared to challenge rules in court. 

Congress also shares the blame, Stanley says. “One of the reasons for the ... amount of regulatory discretion and the amount of stuff handed over to the regulators is that Congress itself was unwilling to bite the bullet and do, you know, bigger-scale things that would have guaranteed systemic change,” he said.

Once all the law's rules are finalized—which is unlikely to happen before its third birthday this July—criticism could slow down as the focus turns to enforcement and compliance. Maybe.

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