A few weeks after the election I wrote a post about a Wall Street Journal piece that asked whether compliance was dead under President Trump. At that time the question was forward looking as the new administration had not yet come into power. Now, with just a few weeks of experience with this administration, the answer to that question is starting to take shape.
On January 30, President Trump issued an Executive Order on Reducing Regulation and Controlling Regulatory Costs. In the Purpose of this section the order states: “[i]t is important that for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.” That one-for-two concept is reiterated in Section 2. Regulatory Cap for Fiscal Year 2017, Subsection (a) states “Unless prohibited by law, whenever an executive department or agency (agency) publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed.”
As someone who has made her career in regulatory compliance, this makes my head spin! There are outdated regulations that no longer serve an important or current regulatory purpose. There are regulations that were poorly conceived and therefore do not advance the regulatory purpose they were designed to address. There are overly complicated regulations that result in unnecessary compliance challenges. These, and other similar, regulatory issues should be addressed. However, a one-in to two-out concept for reducing regulations, which does not even look at the regulatory purpose (the benefit) of the regulations being added or removed reflects the notion that a smaller number of regulations is better regardless of the need or purpose for the rules. In my decades-long history in regulatory compliance, that is simply not the case. In fact, in my experience, there is nothing simple about effective regulation or regulatory reform.
One reason it is not a simple matter to reform a regulatory framework in any industry, but especially in financial services, is that typically a cost-benefit analysis is the approach used. Bloomberg Businessweek’s February 13-19 issue discusses some measurement challenges in Brendan Greeley’s article Trump’s New Math on Regulations. Both sides are hard, but there appears to be little doubt that measuring the benefit of a regulation is more difficult than measuring its cost. In Trump’s Executive Order, though, we don’t have to worry about measuring benefits. He makes clear that only one side of the equation matters: cost. He states in Section 2.(c) “any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations.” Section 2.(d) of the Executive Order goes on to state: “The Director [of the Office of Management and Budget] shall provide the heads of agencies with guidance [that shall] address, among other things, processes for standardizing the measurement and estimation of regulatory costs; standards for determining the costs of existing regulations that are considered for elimination; processes for accounting for costs in different fiscal years; methods to oversee the issuance of rules with costs offset by savings at different times or different agencies; and emergencies and other circumstances that might justify individual waivers of the requirements of this section. The Director shall consider phasing in and updating these requirements.”
In my experience, regulatory agencies are not populated with people who like regulations for regulations’ sake. Instead people who work in regulatory agencies are committed to serve the purpose for which the agency exists and they see regulations, compliance with regulations and enforcement of compliance as an effective way to change individual and corporate behavior to accomplish the goals of the agency. That is not to say that we all agree on what the goals should be of any agency – certainly that is not the case. But to remove benefits from the equation makes the analysis simplistic in a way that, in my opinion, denigrates the importance of regulatory compliance in serving the public good. Even if one believes in limited regulation, presumably that limited regulation has to be effective, not just cheap.
I am not opposed to any discussion about whether a particular regulation or a group of regulations is actually beneficial or even to arguments about how much any benefit may be worth to us as a society. But I am totally opposed to the concept that any regulation is a bad regulation and that any regulation has merely a cost element and no offsetting benefit.
The suggestion that the only thing that matters is the cost of a regulation is just a way of saying that all regulations are bad. Some may be “more bad” than others – but it is not those that are less effective or those that do not have a clearly identified purpose – no, those that are “more bad” are those that are more costly, however that is calculated and regardless of their benefit.
This simplistic approach to regulatory reform may have another consequence, one that a Thomson Reuters article dated February 14, 2017 calls “Slow-rolling” by agencies. Richard Satran, writing for Thomson Reuters’ Regulatory Intelligence notes that “Reversing regulations that strike at the heart of an agency’s prior work may be even more difficult than passing new ones…The president cannot simply issue an executive order rescinding regulations he does not like. [said Rachel Augustine Potter, assistant professor of politics at University of Virginia] The process requires research, stakeholder meetings, publishing of proposals, comment periods and final publication. Delays can occur at any of these stages.”
Andrew Kent, a law professor and constitutional expert at Fordham University is also quoted in the Regulatory Intelligence piece. His analysis is another justification for considering the benefits of existing regulation: “In a bureaucracy there are a lot of different ways people can slow down presidential initiatives they don’t agree with… And given the things this administration has been saying about agencies’ work, it is pretty likely that will happen.”