Killing Dodd-Frank before the rules are even fully written

The Trump administration is already digging graves for some of the regulatory rules put into place by the Dodd-Frank financial reform act — but the legislation never fully lived in the first place.

About 30 percent of the rules mandated by the sweeping reform package have yet to be implemented after years of being held up by legal action and the complexity of the task handed to regulators. After the bill was signed into law in 2010, many of the nearly 400 new rules were waylaid as they were run through the rule-making process of regulatory agencies like the Securities and Exchange Commission and Commodities Futures Trading Commission.

Take, for example, anti-corruption rule requiring that energy companies disclose the payments they make to foreign governments. Republicans in Congress summarily killed the rule last month. The law required the SEC to have that rule in place by April 2011, but the agency didn't issue a rule until 2012, when it was immediately challenged in court by industry groups and struck down in 2013 by a federal judge. After being sued for its delay in creating a rule, the SEC finally issued one in 2015. The new rule became effective in September 2016 — just four months before it was wiped out by the GOP-led Congress.

Countless other rules also stalled during the Obama administration, and some now may never be finalized. While most deadlines were about a year after the law was instituted, actual rule-making has progressed slowly every year since then. As of this week, about 72 percent of rules have been finalized, according to data from the law firm Davis Polk, which has been tracking the law's many provisions for years.

Some of Dodd-Frank involved provisions that went into effect immediately, but much of the 800-page law simply were guidelines that required regulatory agencies to formulate and enforce hundreds of new rules. Congress then set aggressive deadlines that were often missed by regulators trying to work out viable rules.

"This many rules take years to write, and some are very complex, and these agencies had other matters on their plates," said Davis Polk's Annette Nazareth. "I don't think for the most part people thought that the rules could possibly be completed by those deadlines."

From the beginning, regulators raised the alarm that implementing and enforcing the bill would be a Herculean task, given the agencies' limited funding and manpower. The Obama administration has consistently requested additional funding for regulators, but found itself stymied by opposition from the House of Representatives. A 2015 IMF report also noted the SEC and CFTC seemed to lack sufficient resources for their expanded responsibilities over areas like swaps, hedge funds and municipal advisors.

An SEC spokesperson declined to comment and the CFTC did not respond to a request for comment.

"Funding limitations have impacted the timely delivery of new rules and the implementation of registration programs for the new categories of participants," wrote the authors.

Former Rep. Barney Frank, co-author of the eponymous bill, said Republicans were set on cutting appropriations for regulators. Frank said the rules also saw strong opposition in a very conservative D.C. court system.

"This wasn't a willful failure on their part," Frank said of the regulators. "They were slowed down by knowing they were going to be sued, and the courts that were going to hear it were unfavorable."

Just knowing a technical rule devised by regulators might be challenged by outside groups and then blocked in court (as many were) can drag out the rule-making process across the board. Not only were many of the Dodd-Frank regulations mind-bogglingly complex, but cost/benefit analyses and other materials had to be prepared for many rules.

"The history in the last couple years of people challenging regulations had an impact on the timing of rulemaking, because the agencies were trying to make them litigation-proof and wanted to ensure they could sustain a challenge," said Nazareth. "So they took a lot longer to produce them than they had in the past."

But Norbert Michel, research fellow in financial regulations for the conservative Heritage Foundation, said blaming the untimeliness of the Dodd-Frank rulemaking on insufficient resources or legal challenges is a "weak" explanation.

"Dodd-Frank doesn't say 'thou shall do that.' It says 'the SEC shall write a rule that does that,'" said Michel. "I wouldn't ascribe it to motive, efficiency, funding or anything in particular. I think they got dumped with a nearly impossible task, and everyone did the best they could."

Even if Congress had thrown money at all of the agencies involved and multiplied their staffs, they still would have been tackling a task that had never been done before, said Michel. Regulators were asked to make decisions about extremely complicated regulatory issues — and some, like the Volcker Rule, had to be approved across multiple agencies — and that's why it took a really long time.

Whatever the reason for the slowdown, the last 20-30 percent of rules are likely more vulnerable than those completed closer to their original deadlines. President Donald Trump has indicated his administration intendeds to roll back the bill, and he issued an executive order initiating a review.

"We expect to be cutting a lot out of Dodd-Frank, because, frankly, I have so many people, friends of mine, that have nice businesses that can't borrow money," Trump said last week. "They just can't get any money because the banks just won't let them borrow because of the rules and regulations in Dodd-Frank."

Ultimately, much of Dodd-Frank (and many of the most politicized issues) would require congressional action to undo. The Financial Choice Act, a Republican bill that would eliminate the Volcker Rule and the Consumer Financial Protection Bureau, could make many of those changes.

But Congress is unlikely to repeal the full act.

"I think it's quite clear from the executive order that what's being done is much more nuanced — it's not going to be 'Let's get rid of all of Dodd-Frank," said Nazareth. "I think they're going to look holistically and determine what works and what doesn't work."