Regulatory: Implementation of Financial Reform Begins

The first visible steps have been taken in the government's efforts to promulgate the hundreds of regulations that will be necessary to implement the financial institution reform legislation. The Administration has taken one major step, however, that seems destined to raise significant institutional issues in the implementation of the new law.

Among the first implementing rules to appear, on October 1st the Commodities Futures Trading Commission will propose a critical rule required by the statute, which will increase public visibility of the derivatives market by establishing time periods within which swap transactions must be reported to the government or to a swap depository. The rule also will define the principles governing operation of clearing houses and swap execution facilities. Similarly, the staff of the Federal Reserve Board has begun the consultation process with public interest groups and financial institutions that will be affected by the forthcoming rules by which banks will be regulated.

In a major and potentially contentious step, the Administration announced its plans for the new Consumer Financial Protection Bureau, the most significant new federal agency created since the late 1970s. For the foreseeable future, the Bureau will operate as a headless agency. The President has decided to take advantage of a provision in the law that allows the Secretary of the Treasury to exercise the authority delegated to the Director of the Bureau until the first Director is confirmed. The President has selected Professor Elizabeth Warren to run the Bureau, but has neither nominated her nor given her a recess appointment as Director. Instead, Ms. Warren has been named to two other positions that do not require confirmation. She will serve as an Assistant to the President and as a Special Advisor to the Secretary of the Treasury. Thus, the new agency will operate for a significant period of time without a confirmed official at its head.

This effort to work around the confirmation processes presents three issues. First, Congress created the Bureau as an independent, non-political agency that would not be subject to the direction of the White House or Treasury. However, for the foreseeable future the agency will be run by the White House, and the President's subordinates will make the critical decisions about the Bureau's policy priorities and the substance of its decisions.

Second, this arrangement makes future executive privilege battles unavoidable. Prior Administrations have carefully avoided situations in which Congress might be able to call members of the President's staff to testify about internal White House deliberations. With Ms. Warren's dual appointments, Congress will be able to subpoena her in her Treasury capacity, and she would be hard put to avoid testifying about decisions in which she participated. Thus, the only way the Administration will be able to prevent Congress from inquiring into the White House policy process is by invoking executive privilege and directing her not to appear.

Finally, if the headless agency persists for too long a period, entities adversely affected by a Bureau decision may challenge those substantive decisions on the ground that, by declining to nominate a Director, the White House de facto usurped authority that Congress delegated to an officer who would be independent of the President.

In sum, the new Bureau will begin life with significant institutional questions hanging over its head.

John F. Cooney is a partner in the Washington, D.C., office of Venable.

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John Cooney

John F. Cooney is a partner in the Washington, D.C., office of Venable.

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