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The Rules of the Game
For federal agencies charged with implementing the Dodd-Frank Act, writing rules is only half the battle. They also have to come up with a cost-benefit analysis that will pass muster with the courts—or avoid rule-making entirely.
"Cost-benefit analysis is viewed as an obstacle to Dodd-Frank implementation," said Kathleen Casey, a former commissioner of the Securities and Exchange Commission, speaking in June at a panel sponsored by the Federalist Society. "People are worried that cost-benefit is an impediment to achieving the greater good."
Now a senior adviser at Patomak Global Partners, Casey argued that such analysis is crucial to "ensure that at the end of the day, the rule will be effective."
According to Davis Polk & Wardwell's monthly Dodd-Frank rule-making progress report, agencies including the SEC, the Consumer Financial Protection Bureau, the Commodity Futures Trading Commission, and bank regulators have been tasked with writing 398 rules to implement the law. As of April 1, 148 rules had been finalized.
Panelist Deepak Gupta, a former senior official at the CFPB, said that he's "afraid what will happen when CFPB rules face the test" of cost-benefit analysis before a court, adding that he's "very troubled" by past cost-benefit challenges before the U.S. Court of Appeals for the D.C. Circuit.
"I'm concerned that cost-benefit analysis is now being used as a disguised form of second-guessing rule-makings," said Gupta, founder of Gupta Beck and an adjunct professor at Georgetown University Law Center.
The SEC in recent years has not fared well when it comes to judicial review of its cost-benefit analysis. Perhaps its most stinging defeat came in 2011, when the D.C. Circuit shot down the agency's proxy access rules, finding that the commission "inconsistently and opportunistically framed the costs and benefits."
The decision showed "a real, palpable frustration" by the court that "the agency is just not getting it," Casey said. She also noted that "where the agency has failed miserably in the past . . . is when it completely abdicated its obligation to even hazard a guess on costs." She added: "The court said you've got to at least try."
George Mason University School of Law professor Todd Zywicki, who also spoke on the panel, said that the CFPB may be trying to "evade cost-benefit completely" by issuing guidance and bringing enforcement actions instead of writing rules.
For example, Zywicki noted that the agency recently issued an informal bulletin rather than a rule to warn that lenders offering auto loans through dealerships can be held responsible for unlawful, discriminatory pricing. He said that the agency also side-stepped the rule-making process by refusing to define "abusive" conduct, relying instead on enforcement actions to lay out the standard.
A version of this story appeared in The National Law Journal, a sibling publication of Corporate Counsel.