U.S. Chamber of Commerce President and CEO Thomas J. Donohue issued the following statement regarding President Trump’s executive actions on regulations:

“The U.S. Chamber applauds the president for fulfilling the campaign’s promise to take on the regulatory juggernaut that is limiting economic growth, choking small business, and putting people out of work. We look forward to working with the administration to identify the regulations doing the most harm and recommend solutions that drive growth and jobs.

“We also urge the Senate to take up the House passed ‘Regulatory Accountability Act’ to stabilize the regulatory process going forward.”

Holding us back: Regulation of the U.S. manufacturing sector

Monday, February 6, 2017 - 5:15pm

2.6.17- Multi-Association Letter to Senate Supporting the Regulatory Accountability Act

Dear Majority Leader McConnell and Democratic Leader Schumer:

The undersigned 616 groups from each of the 50 states strongly urge you to consider and pass the Regulatory Accountability Act of 2017 (RAA), to be introduced by Senator Portman. The RAA recently passed the House with a bipartisan vote of 238-183, and now we urge you to do the same. We believe that federal regulations should be narrowly tailored, supported by strong and credible data and evidence, and impose the least burden possible, while implementing congressional intent.

Now is the time for Congress to reclaim its constitutional legislative authority by ensuring agencies implement congressional intent, not the intent of the agency. With both the new presidential administration and the U.S. House of Representatives agreeing on the urgent need for regulatory reform, the Senate is presented with a once-in-a-generation opportunity to pass much-needed modernization of the Administrative Procedure Act (APA), whose rulemaking provisions have remained virtually unchanged since it was enacted in 1946.

The Senate has a unique chance to bring real structural reform to the way agencies adopt the most costly rules that fundamentally change our nation.

The RAA builds on established principles of fair regulatory process and review that have been embodied in bipartisan executive orders dating to at least the Clinton administration. The RAA stands for good governance and getting rules right by bringing transparency, accountability, and integrity to the rulemaking process at federal agencies. With the passage of RAA, Congress would be restoring the checks granted to it by the Constitution over a federal regulatory bureaucracy that is opaque, unaccountable, and at times overreaching in its exercise of authority.

The undersigned groups agree that it is time for a change and strongly support the Regulatory Accountability Act. We urge the members of the Senate to join their House colleagues, who have already passed this critical legislation, by giving it high priority for consideration as soon as possible. We look forward to working with you to enact this important legislation.

Of the many polarizations of the United States today, the battle over regulation is particularly fierce and many years in the making. Over the past decades, since at least the presidency of Ronald Reagan, the right and the Republican Party have come to view regulation as the premier sign of government overreach, stifling freedoms and hobbling economic growth. The left and the Democrats for the most part see regulation as the vital bulwark protecting the mass of Americans from corporate and government abuse.

So it should hardly be a surprise that the White House’s recent moves to revisit the regulatory state have evoked high levels of emotion. However predictable, let’s try not to lump these moves into the same toxic stew that has enveloped so much of Trumplandia. There is a real, genuine and constructive debate that could be had over regulation—what is enough, what is too much and what is smart. In today’s hyper, near-hysterical political climate, that may well be asking too much, but that makes the call for it all the more vital.

On Friday, the president signed an executive order that was widely described as beginning the rollback of financial regulations enshrined after the 2008-09 financial crisis in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The order itself, however, was much vaguer than that, titled simply, “Presidential Executive Order on Core Principles for Regulating the United States Financial System.” The text was equally anodyne, a few short paragraphs laying out six utterly unobjectionable principles (“prevent taxpayer-funded bailouts” and “foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis…”) and directing relevant government agencies to review all current regulation.

It wasn’t the bland text of the order that provoked a strong reaction on the left—it was Trump’s comments and the optics of the former president of Goldman Sachs, Gary Cohn, grinning over his shoulder as he signed it. Earlier in the day, Trump told a meeting of financial CEOs, “We expect to be cutting a lot out of Dodd-Frank … Because frankly, I have so many people, friends of mine, that had nice businesses, they just can’t borrow money ... because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.” Cohn added later, “We’ve been told we need deregulation to grow jobs in this country. We are not anti-regulation. We want smart regulation that allows our financial services to be the envy of the world.” Hard to argue with that sentiment, and yet…

The response was swift and hyperbolic. Sen. Bernie Sanders laced into Trump as “a fraud” who duped voters into thinking he would be for the common man. Sen. Elizabeth Warren, who helped shape the Consumer Financial Protection Bureau, one of the key innovations of the act, piled on and accused Trump of cynically and hypocritically lambasting Wall Street when running for president and siding with Wall Street now that he is president. She acidly remarked that Wall Street titans must have been popping champagne corks afterward, and she might actually be right about that.

The conviction that Dodd-Frank has choked off lending is widespread in financial circles, but it is not entirely consistent with the facts. Lending certainly did drop precipitously after 2009, which would be expected given the near implosion of the financial system and the near insolvency of the nation’s largest banks holding trillions of dollars of derivatives whose value was in question. With the economy contracting and then only slowly recovering, demand for loans was muted at best, regardless of regulations and capital requirements. Drawing a causal line to financial regulations is difficult, and even with Dodd-Frank in place, lending is now back to where it was in 2007, according to the Federal Deposit Insurance Corp.

On the flip side, the new thicket of agencies and regulations have undoubtedly raised the cost of compliance for financial institutions, and led to a risk-adverse culture that is almost a mirror to the anything-goes culture that prevailed to such destructive effects before the crisis. Many large banks now have half a dozen federal regulatory agencies that oversee them, with overlapping responsibilities, each auditing and issuing complicated and at times contradictory rules, each in its own way well-intentioned and addressing real issues and excesses but whose net effect makes it impossible for smaller banks to ever bear the costs of compliance. Hence small and community banks continue to disappear, burdened by costs they can’t quite bear and capital needs that are ill-suited to their scale, until they are swallowed by larger banks that homogenize credit standards to the detriment of local knowledge and individual decision making that would potentially benefit entrepreneurship, business creation and community revitalization. The upshot is that Dodd-Frank has done what many large, complicated regulatory frameworks do: inadvertently privilege and strengthen the large institutions that are purportedly the object of the regulations in the first place.

(Full disclosure: I have worked for, run and consulted with asset management and financial service companies over the past 15 years, but little that I’ve done has been directly covered by Dodd-Frank, nor have I perceived much negative impact from the bills in my corner of the financial world, which is as distinct from banks as nursing is from biotech in the health care industry.)

One of the most acute critics of the modern regulatory state, Philip Howard, has relentlessly advocated for regulation to be driven solely by the common good, which would mean a good deal of deconstructing the current regulatory state. He, like others, has drawn attention to not just the inevitable bureaucratic creep, but also the way each special interest group demands its own tweaks to regulation, which then adds to the general sclerosis and impedes economic activity.

The idea that we could have better, more efficient and less costly regulation should strike nobody as radical or objectionable. When Bill Clinton was elected in 1992, one of Vice President Al Gore’s first initiatives was to reduce government bureaucracy and regulation to make government smarter and more effective. Barack Obama embraced the same mantra as he entered office. So did George W. Bush. The public debate on regulation tends to unfold in partisan terms, with supposedly pro-regulation Democrats pitted against deregulatory Republicans. But each new president over the past 25 years has understood that there is a nonpartisan space to debate good regulation vs. bad, effective vs. ineffective, costly and cumbersome vs. nimble and cheap. Clinton and Gore tried—and essentially failed—to reinvent government; Bush intended to focus on canceling regulations, but his administration ended up mired in foreign policy; and Obama hired noted legal scholar Cass Sunstein to review all regulation in 2009 with only marginal effect on the labyrinthine regulatory state.

In spite of these efforts, that regulatory state has grown in scope each year after relentless year, under Republicans and Democrats alike. New rules continue to proliferate, as do costs—2015 was a banner year, with 81,000 pages of new rules published in the Federal Register.

Now comes Trump promising to review and eliminate, which is immediately treated as handing the keys of the financial industry to the Wall Street titans who profited from the chaos and escaped accountability. It may be, of course, that the rules are rewritten purely to benefit the large banks, but it is also true that the White House cannot unilaterally rewrite those rules and that the Republicans who now control Congress have no mandate to roll back needed consumer protections. Holding the White House and Congress accountable for maintaining a regulatory framework that protects the public good is essential. But you can defend necessary, prudent regulation and also support rationalizing the current morass of competing, onerous and contradictory rules.

These debates also assume a high level of distrust and suspicion that can only harm the body politic. Regulatory frameworks often work best when industry works with regulators to achieve common goods and systemic stability; a constant state of antagonism impedes that, as do inflexible rules and doctrinaire regulators. The British financial regulatory system established after 2009, for instance, tries to create a more cooperative framework for financial institutions to work with regulators to achieve widely accepted social goods such as innovation, stability and the free-flow of credit. Punishment and fines are always part of the mix, but not to the exclusion of working jointly to common ends.

It is almost impossible to imagine a civil, measured approach to these questions of regulation and the financial industry in today’s political climate in the United States. The complete absence of trust and respect between the current administration and many of its constituents is not a recipe for lasting reform. That is one of many shames. America needs to modernize and rationalize many of its most important regulations, in the financial world, in health care, and elsewhere.

A system of prudent regulation facilitates our ability to meet common needs, but that is not the system we have. Previous administrations have tried to address the problem and failed. A new and controversial White House is now taking a crack at fixing it. Regulatory reform would be a great boon to our future, if only we could find our way to it.

Zachary Karabell is head of global strategy at Envestnet and author of The Leading Indicators: A Short History of the Numbers That Rule Our World. He is a contributing editor at  Politico Magazine.

White House Issues Interim Guidance Memo on Implementation of "Two-for-One" Executive Order On Regulations, Invites Public Comment

On February 2, 2017, the Acting Administrator of the Office of Information and Regulatory Affairs (“OIRA”) issued a guidance document (the “Interim Guidance”) intended to help clarify President Trump’s January 30, 2017 Executive Order titled “Reducing Regulation and Controlling Regulatory Costs” (the “Order”), an Order most discussed for its demand that each federal agency repeal two regulations for any new rule issued.  As discussed below, however, we believe that the most meaningful part of the Order is the regulatory cost cap, which will require departments and agencies to fully offset the cost of any new regulation by reducing the cost of existing regulatory requirements. The Interim Guidance is timely, as significant questions have arisen about how the Order will be implemented in practice.

The Order

By way of background, the January 30th Order contains two core principles, effective immediately and applicable for the balance of the federal government’s 2017 fiscal year¹:  first, Section 2(a) of the Order, the “two-for-one” directive that for every new regulation issued, two existing regulations shall be repealed; and second, in Section 2(b) and (c), a “regulatory budget” or “cost cap” concept directing that any new regulations issued in fiscal 2017 shall not result in additional incremental costs not offset by eliminating existing costs, unless otherwise required by law. 

The Order uses the same definition of the term “regulation” that has long been used in other Executive Orders going back to the Reagan Administration. It not only includes conventional rules and regulations but any “agency statement[s]” that “implement, interpret, or prescribe law or policy.” This means that it potentially covers agency guidance and interpretive documents, applicability determinations, letter rulings, and administrative judicial opinions. As with the prior Executive Orders, the Order does not apply to regulations directed internally at the federal government (such as organizational restructuring) rather than the public, nor to rules involving military, national security, or foreign affairs.

The “two-for-one” concept seems to have attracted the most attention from commentators, with a number of logical questions about implementation being posed:  How does an agency decide whether an eliminated rule (or guidance) qualifies?  Does removing two tiny rules or scrapping two old guidance documents to make room for one large new rule qualify?  Does the Order apply to non-discretionary rulemakings required by statute?  Are there really enough obsolete, burdensome, non-mandatory regulations available for elimination to begin to cover the many future rulemakings that have already been mandated by Congress or court order?

The regulatory budgeting component of the Order attracted less media attention but also raises a number of questions.  How to estimate regulatory costs and cost savings, whether regulations that purport to save people money, like energy efficiency requirements, can be used to offset regulatory costs, and how to account for rules finalized during the first three to four months of the fiscal year – these questions are equally significant.

One issue of critical concern that immediately arose is whether so-called “independent agencies” are covered by the Order. The Order itself simply refers to “executive departments or agencies” but provides no elaboration on what those terms mean. On January 30th, however, a White House spokeswoman told the press that independent federal agencies like the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and the Commodity Futures Trading Commission are not covered by the Order. As discussed below, the Interim Guidance further clarifies this issue.

The Interim Guidance

As expected, OIRA will play a key role in implementing the Order. OIRA is the office within the Office of Management and Budget (“OMB”) that deals with regulatory issues, and the Interim Guidance was issued by the Acting OIRA Administrator. It gives departments and agencies substantial discretion over the implementation of the Order’s “two-for-one” requirement but sends a strong signal that OIRA will play close attention to the regulatory cost cap and budgeting requirements.

This is not a surprise. Anyone who has been involved with federal regulatory issues can imagine how an agency could easily “game” the two-for-one requirement, and OIRA has little interest in policing such behavior. For good reasons, OIRA is much more interested in the cost imposed by regulations than in any effort to count the number of them.

The Interim Guidance is presented as a general restatement of the requirements of the Order with some clarifications, followed by guidance in a “frequently asked questions” format. The guidance starts by narrowing the coverage of the Order to a very significant degree by applying it only to “significant regulatory actions,” referencing a term defined in Section 3(f) of Clinton-era Executive Order 12866, which includes regulatory actions likely to have an annual effect on the economy of at least $100 million or cause other material adverse effects to any sector of the economy. OIRA has discretion to treat virtually any regulatory action as “significant” if it raises important policy issues or may set a precedent for other regulatory decisions.

The guidance also clarifies some timing issues – agencies may comply with the Order by issuing two “deregulatory” actions for each “new significant regulatory action,” which deregulatory actions must be “identified” (but not necessarily implemented) before the agency issues a new rule, and the determination of whether the incremental costs of a new rule have been fully offset appears to be measured as of September 30, 2017 rather than at the time of promulgation.

In the FAQ section of the Interim Guidance, a number of additional clarifying directions are provided:

• Guidance: Despite the breadth of the Order’s definition, “new significant guidance or interpretive documents” will be covered by the Order only on a “case-by-case basis” as determined by OIRA. In other words, new guidance may or may not require removals or offsets; and the removal of existing guidance may or may not qualify as offsets.
• Independent Agencies. The Interim Guidance confirms the reports that the Order only applies to the agencies covered by EO 12866, excluding statutory “independent agencies,”² but the guidance encourages those independent agencies to voluntarily follow the Order’s approach to deregulatory actions and cost offsets.
• Congressional Action: If by action of Congress (but not the courts), an existing rule is removed, that removal appears to count toward future “two-for-one” and regulatory budget determinations. The Interim Guidance explicitly states that regulations that Congress disapproves under the Congressional Review Act can be used as offsets, i.e., that regulatory costs eliminated by Congress can be considered for purposes of an agency’s regulatory budget; but that regulations overturned in court cannot.
• Deregulatory Actions Short of Outright Repeal: The Interim Guidance’s focus on “deregulatory actions” raises the immediate question of whether relief from some but not all components of a regulation would count toward “two-for-one” and costs savings determinations under the Order or whether imposing a less burdensome replacement rule would qualify as an offset. The Interim Guidance suggests that these determinations will be made on a case-by-case basis as well.
• Energy Efficiency Regulations: The Environmental Protection Agency (“EPA”) and the Department of Energy (“DOE”) have issued regulations that purport to save people money by requiring them to purchase more efficient products.  Some economists, including former OIRA economists, have been skeptical of these claims, and the Interim Guidance addresses this issue explicitly.  It says that cost savings from energy efficiency rules will not ordinarily be deemed to offset the costs of a new rule under the Order.
• No Double-Counting: In contrast to the past practice of some agencies, the Interim Guidance makes clear that cost savings “should be counted only once” and can only be tallied for “the regulatory action” that actually eliminates a requirement that imposes costs to society. 
• Waivers for Emergencies and Other Legal Requirements. The Interim Guidance indicates that OIRA can waive the requirements of the Order where necessary for an agency to respond to an emergency. Perhaps more importantly, the guidance also clarifies that agencies “may proceed with significant regulatory actions that need to be finalized in order to comply with an imminent statutory or judicial deadline even if they are not able to identify offsetting regulatory actions by the time of issuance,” although the agencies are nonetheless directed to eventually make that effort.

While there remain numerous questions about how the Order will actually be implemented going forward, especially given that most existing and new rules to some degree result from statutory or judicial mandates that agencies cannot override, the Interim Guidance nonetheless provides important clarifications that answer some of the most immediate questions. In the meantime, OIRA has requested public comment on the Interim Guidance by February 10, 2017, offering the public and the regulated community an opportunity to seek additional clarifications.

The strength or weakness of the Order is wrapped up in its implementation, a task that will ultimately fall to OIRA. The staffing of OIRA is a work in progress although transition staff has included experts in regulatory budget approaches. Clients are well advised to make their positions known to OIRA staff on the process of implementing the Order as well as on the costs necessitating an offset.

Strategically, a company or business group that is advocating any sort of regulatory reform should carefully consider how it will likely be treated for purposes of an agency’s regulatory budget.  In particular, it would be very helpful to quantify the cost savings that would result from the proposed reform – and to quantify it in a way that would pass muster with OIRA. Please contact us to discuss practical recommendations for approaching OIRA and other OMB offices.
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¹ The federal government’s fiscal year 2017 runs from October 1, 2016 to September 30, 2017.

² The “independent agencies” excluded from EO 12866 and, therefore, the Order are listed in the Paperwork Reduction Act, 44 U.S.C. § 3502, as “the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Consumer Product Safety Commission, the Federal Communications Commission, the Federal Deposit Insurance Corporation, the Federal Energy Regulatory Commission, the Federal Housing Finance Agency, the Federal Maritime Commission, the Federal Trade Commission, the Interstate Commerce Commission, the Mine Enforcement Safety and Health Review Commission, the National Labor Relations Board, the Nuclear Regulatory Commission, the Occupational Safety and Health Review Commission, the Postal Regulatory Commission, the Securities and Exchange Commission, the Bureau of Consumer Financial Protection, the Office of Financial Research, Office of the Comptroller of the Currency, and any other similar agency designated by statute as a Federal independent regulatory agency or commission.”