Earlier this month, the White House’s Office of Management and Budget (“OMB”) took steps to rein in the ability of independent regulatory agencies to issue guidance, a move that may have implications for several federal financial regulators in their oversight of the financial industry.
On April 11th, Russell T. Voight, OMB’s Acting Director, issued a memorandum to the heads of all executive departments and agencies on their obligations under the Congressional Review Act (“CRA”) to submit the rules they have promulgated to Congress for review. The memo “reaffirms the broad applicability of the CRA to all Federal agencies and a wide range of rules,” and asserts that the CRA covers a “wide range of regulatory actions, including … guidance documents, general statements of policy, and interpretive rules.” Accordingly, under the OMB’s memo, agencies would be required to notify the Office of Information and Regulatory Affairs (“OIRA”) of all upcoming rules prior to public release, including guidance documents and other guidelines, and submit to OIRA for a major determination any rule likely to result in an impact on the economy of $100 million or more annually. Any rules or guidance receiving a major determination from OIRA would then be sent to Congress for review.
The new requirement that agency guidance must be reviewed by OIRA prior to issuance will especially impact financial regulatory agencies, including the Federal Reserve Board (“Fed”), the Securities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission (“CFTC”). Many of these agencies operate independently from the executive branch, making decisions through a group of bipartisan members. Although it will not apply to the Fed’s development of monetary policy, the review process outlined in the memo will impact the Fed’s oversight of the banking industry. According the Washington Post, the Fed often uses guidance to set expectations for banks without going through the formal notice-and-comment process for rulemaking, citing as an example the guidelines issued in 2013 by the Fed and other banking regulators aimed at limiting banks’ leveraged lending to corporate borrowers. The Wall Street Journal noted that many in the industry have complained about regulators’ ability to issue informal guidance, which the industry finds burdensome, without the recourse of congressional review and oversight.
The expanded review process set out in the OMB’s memo may also complicate the SEC’s proposed Regulation Best Interest, which would establish standards of conduct investment professionals providing advice to retail investors. InvestmentNews reported that the new review process may slow down the SEC’s ability to issue a final version of the rule, which the agency proposed over a year ago and had hoped to finalize by summer. The SEC’s proposal would almost certainly qualify as a major rule requiring additional congressional review under the CRA. The review process would also place additional scrutiny on the economic analysis supporting the proposal, which has been characterized as weak by some former SEC chief economists and by current SEC Commissioner Robert J. Jackson Jr. InvestmentNews also commented that the new review requirements could hamper the SEC’s ability to issue guidance on complex rules as well as no-action letters, which some industry observers speculated may have a chilling effect on the SEC’s willingness to issue guidance and prolong the SEC’s process for issuing no-action relief. A few days before the OMB released its memo, SEC Commissioner Hester M. Peirce raised concerns about the prevalence of the SEC’s guidance materials, likening the agency’s guidance to “secret law that, for all practical purposes, binds at least some … market participants without any opportunity for review or appeal.”
While federal agencies digest the new requirements, opinions are divided about the ultimate impact of the OMB’s memo. Conservatives have long sought a mechanism to curtail the power of regulators to unilaterally impose strict regulations that may hurt economic growth, and the OMB’s memo takes a step in that direction. Consumer advocacy groups, on the other hand, objected to the new requirements. Speaking to The New York Times, Lisa Gilbert of Public Citizen called the memo “a naked power grab on the part of the Trump administration.” Former board members of the National Credit Union Administration (“NCUA”) told the Credit Union Times that they were concerned the review process would undermine the independence of the federal financial regulators. David Zaring, an associate professor at the University of Pennsylvania’s Wharton School, told Law360 that the OMB’s memo may have the unintended consequence of slowing down the administration’s deregulatory agenda, since new rules aimed at streamlining current regulations would also be subject to the same review process. Some industry observers wondered if the agencies would comply with the directive. Cary Coglianese, director of the University of Pennsylvania Law School Program on Regulation, questioned whether the OMB had any recourse if an agency did not comply with the memo’s requirements, observing that “there’s not really built into the Congressional Review Act or this memo anything that would — for guidance, at least — create any consequences for the agency.”