A New Year For Unaccountable Financial Regulators
Former Morgan Stanley chief U.S. economist Richard Berner was confirmed by the Senate on New Year's Day to serve as the first director of the Office of Financial Research (OFR). The OFR was created by Dodd-Frank to provide another new Dodd-Frank regulator, the Financial Stability Oversight Council (FSOC), with information to monitor risks in the U.S. financial system. These regulators are likely to play an increasingly important role in the economy, but they will do so with little accountability or transparency.
The OFR, although already in operation, will likely intensify its information-gathering activities now that it has a director. Under Dodd-Frank, Berner will serve a six-year term, and no government entity or person-including the President-has grounds for removing the OFR director. The statute gives him "sole discretion" for determining how to carry out his Dodd-Frank authorities. One of those authorities is the right to subpoena any information he wants from financial companies. Another is providing the data the OFR collects to firms such as his alma mater Morgan Stanley.
The OFR sets its own budget with no upper limits. Its expenses, which include funding the FSOC, are paid by big banks and other too-big-to-fail entities designated by the FSOC. By placing the FSOC and the OFR outside of the traditional congressional appropriations process, Dodd-Frank has insulated them from meaningful oversight by lawmakers. Dodd-Frank requires only that Berner report to and testify annually before Congress.
The FSOC is also not subject to much control from Congress. It's free to conduct its business as it likes and is only required to report to Congress annually. Because it is made up of the heads of numerous financial regulators, it lacks the accountability of a self-standing agency. No one regulator takes responsibility for its decisions, and its decision-making is not transparent.
Along with the OFR, the FSOC entered 2013 eager to act. As 2012 ended, the FSOC teed up its first attempt to use its authority to force an independent regulator's hand. The council issued proposed recommendations to force the Securities and Exchange Commission (SEC) to undertake money-market fund reforms. In a recent interview with American Banker, Mary Miller, Treasury under secretary for domestic finance, characterized this move as a first test of the FSOC's "infrastructure, the pipes," and proclaimed that if the FSOC is successful in advancing its reforms, then it will "speak well of the FSOC's ability to provide support for an agency to move forward."
The FSOC's proposed reforms are quite similar to those rejected by a bipartisan majority of SEC commissioners in September 2012, so the FSOC's involvement does nothing to move the process forward as Secretary Miller suggests. Before the FSOC got involved, all of the objecting commissioners expressed their willingness to continue working towards a carefully-crafted money-market fund reform compromise. In any event, the SEC could not legally follow the FSOC's recommendations without going through a rulemaking process of its own that - in marked contrast to the FSOC's process - adheres to the procedural safeguards and requirements for economic analysis that govern SEC rulemaking.
As the OFR and the FSOC begin to exercise their new authorities with fervor in 2013, the dangerous autonomy of these entities will become more apparent. Dodd-Frank offers few mechanisms by which Congress can hold accountable the regulators newly created and expanded by the law. As the Nobel Prize-winning economist James Buchanan - who passed away last week - explained, "Within the constraints that he faces, the bureaucrat tries to maximize his own utility. He is no different from anyone else in this respect. He can hardly be expected to further some vaguely defined ‘public interest' unless this is consistent with his own, as he defines the latter." The deliberate creation of unconstrained agencies like the OFR and the FSOC opens the door wide for regulators to further their own interests at the expense of the public.