Many of the regulatory reforms being implemented and proposed under the Dodd-Frank Wall Street Reform and Consumer Protection Act will be vulnerable to legal challenges if the Commodity Futures Trading Commission (CFTC) fails to conduct a “robust cost-benefit analysis” of the new rules, said CME Group last week.
“Although not expressing an opinion as to the viability of such a challenge, the [CFTC’s Office of Inspector General (IG) in a recent report] noted that such challenges to other agencies’ rules had been successful and suggested ‘that a more robust examination of costs and benefits should only enhance the [Commission’s] ability to defend its cost-benefit analyses,'” wrote CME CEO Craig S. Donohue in a letter to the CFTC. CME owns and operates the New York Mercantile Exchange, the Chicago Board of Trade and the Chicago Mercantile Exchange.
He cited a number of instances in which the courts have vacated rules of the Securities and Exchange Commission for its failure to conduct proper cost-benefit analyses.
The CFTC’s IG office initiated an investigation of the formulation of cost-benefit analyses of four rulemakings after concerns were raised on Capitol Hill. A report was issued in April, which identified “several problematic aspects” of the CFTC’s cost-benefit procedures, according to CME.
“The Commission has not abided by [President Obama’s] executive order’s guiding principle that ‘agencies consider the costs and benefits of their regulations and choose the least burdensome path’ in conjunction with many rules proposed under Dodd-Frank,” Donohue said. The executive order, which Obama issued in January, called for a governmentwide review of regulations that could discourage job creation and make the U.S. economy less competitive (see NGI, Jan. 24).
Donohue further contends that the CFTC “has failed to comply with Section 15 of the Commodity Exchange Act (CEA), which requires the Commission to consider the costs and benefits of its action before it promulgates a regulation.”
In addition to closer examination of the costs and benefits, Donohue called on the CFTC to “reassess its apparent decision to repeal the principles-based regulatory regime reinforced and extended [by] Congress in Dodd-Frank.”
While Dodd-Frank amendments to the CEA “grant the Commission discretion, where necessary and appropriate, to promulgate rules and regulations specifically detailing how a registered entity must comply with its core principle obligations, this new language was not intended to give the Commission authority to override the principles-based regulatory regime with a multitude of prescriptive rules dictating not only how registered entities comply with applicable core principles, but also how they conduct their day-to-day business operations,” Donohue said.
He noted that Dodd-Frank amendments to the CEA make clear that self-regulatory organizations (SRO), such as the exchanges that CME owns and operates, “were granted ‘reasonable discretion in establishing the manner in which the [SROs] comply with the core principles.”
While the Commission “purports to consider the cost and benefits of its new prescriptive, rule-based regulatory approach in many of its new proposals…even a cursory review of [its] discussions reveal that the Commission’s cost-benefit ‘analyses’ are cryptic and rote and fail to quantify any specific impacts to industry or even more generally assess the potential detrimental effects such changes will have on the U.S. futures markets,” Donohue said.
In fact, if the CFTC were to identify costs and benefits, “it would find that the costs of abandoning its principles-based regime would far outweigh any benefits of imposing the prescriptive regime it has proposed in several of its NOPRs [notice of proposed rulemakings],” he noted.
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