Federal agencies are starting to roll out the first major rules to implement the Dodd-Frank financial reform legislation. Their promulgation will trigger efforts in Congress to overturn or delay the regulations, which are not likely to be successful, and a decade of legal challenges similar to the wave of cases that followed the passage of the Telecommunications Act of 1996.
Financial institutions are focused on the Commodity Futures Trading Commission’s issuance of multiple rules governing the derivatives market, whose notional value exceeds $500 trillion. The regulations will address fundamental issues, such as the requirement that certain derivatives must be traded over exchanges; regulation of swap dealers, including capital and margin requirements; standards of business conduct; and record-keeping and reporting obligations.
The CFTC is lagging behind the statutory directive that its implementing rules be issued by July 21. Congress does not think in systemic terms and did not consider the consequences of imposing a tight deadline on issuance of rules to transform an important line of business or how financial institutions would express their opposition to the proposals. Congress provided the agency with no additional funds to formulate policy or analyze the highly sophisticated comments about the operation of financial markets that the country’s leading law firms and economists have submitted. In April, the CFTC was forced to expand the comment period on its proposed rules by one month. It is now confronting the task of reading the comments, deciding how best to carry out its statutory mandates while minimizing unintended consequences, and preparing a response to the comments so that the rules can be defended successfully in court.
In light of these delays, CFTC lawyers likely are considering its authority to create safe harbors for regulated entities during the interim period between when the Dodd-Frank provisions become effective and when financial institutions reasonably could come into compliance with the rules. Financial firms also are arguing that significant transition periods will be necessary for them to come into compliance with new rules. If lengthy implementation periods are provided, the industry may obtain a lottery ticket on the possibility that the 2012 elections will product a more sympathetic Congress.
A second major rule will be released on June 29, the Federal Reserve Board’s much anticipated regulation on the interchange fees that may be charged on debit card transactions. Release of the proposed rule prompted a hard-fought battle in Congress, and 54 senators ultimately voted to end a filibuster and delay issuance of the final rule. The terms of the rule have been bitterly contested between large banks that issue debit cards and large retailers that accept them.
As agencies release their final rules, it will be interesting to see if regulated entities determine it is in their self-interest to begin their involuntary relationship under Dodd-Frank by suing their regulator. If litigation is filed as rules are issued, the courts are likely to experience a flurry of motions for preliminary injunctions, especially if the transition periods are not extensive, and motions for accelerated briefing schedules and oral arguments. The litigation will impose substantial burdens on the regulatory agencies to prepare promptly and submit the administrative records on which the cases will be decided. Depending on where opponents decide to file their cases, judges in the D.C. Circuit and the 2nd Circuit may be tested as never before to understand arguments concerning the dynamics of cutting edge financial markets and the possible consequences of government intervention.