CFTC Commissioner Scott O’Malia seeks independent cost-benefit analysis outside agency.
It might seem as futile as trying to boil the ocean but Scott O’Malia will keep the flame on high anyway. That’s because having not realized results talking to his colleagues at the Commodity Futures Trading Commission, the Republican CFTC commissioner has now called on authorities outside the agency to do a review.
After being on the losing side of a 3-2 decision by the CFTC on record-keeping and business conduct standards for swap dealers and other large swap participants, Mr. O’Malia said he would send a letter to the Office of Management and Budget’s acting director, Jeffrey Zients, seeking an independent review.
“After reviewing the Internal Business Conduct Rules, I have reached a tipping point and can no longer tolerate the application of such weak standards to analyzing the costs and benefits of our rulemakings,” Mr. O’Malia said in opening remarks at a recent CFTC meeting. “Our inability to develop a quantitative analysis, or to develop a reasonable comparative analysis of legitimate options, hurts the credibility of this Commission and undermines the quality of our rules. I believe it is time for professional help.”
Mr. O’Malia’s purpose is to determine whether the latest rulemaking complies with President Obama’s executive order of last year directing federal agencies to conduct cost-benefit analysis of their regulations and future rulemaking and OMB guidance; and hopes that if the OMB has concerns, “it will provide specific recommendations as to how the Commission can improve its cost-benefit analysis and analytical capabilities.”
In the letter, Mr. O’Malia further derided the CFTC’s efforts. “I believe the Commission has failed to carefully and precisely identify a clear baseline against which the Commission measured costs and benefits and the range of alternatives under consideration in this rule.”
Cost-benefit analysis has become a common complaint among those who have to adhere to the rule.
For instance, merely complying with Sections 404 and 406 of the Dodd-Frank law – which according to the Securities and Exchange Commission requires SEC-registered investment advisers with at least $150 million in private fund assets under management to periodically file a new reporting form – will cost in the hundreds of thousands of dollars. According to the Economist, which conducted an informal survey of hedge funds, the cost of filling it out that form “will be $100,000-150,000 for each firm the first time it does it. After having done it once, those costs might drop to $40,000 in every later year.”
And recently, departing SEC Inspector General David Kotz’s issued a report critical of the process by which cost-benefit analysis is done at his former agency. Quantitative discussions of cost-benefit analyses, he wrote, “varied among rulemakings” and that his own review found that the SEC “sometimes used multiple baselines in its cost-benefit analyses that were ambiguous or internally inconsistent.”
In his letter to the OMB, Mr. O’Malia also pointed out that the CFTC had doubts about Swap Data Repository data, admitting that the SDRs as new entities wouldn’t have a track record. Nonetheless they used the data to form the rules. “If the Commission truly has doubts as to the fidelity and reliability SDR data, than it ought not to have relied upon it in a proposed rulemaking.”
“The Commission has failed to follow OMB direction and has not shared its supporting documentation to validate and replicate its conclusions,” Mr. O’Malia wrote. “I hope that you will direct the OMB to undertake a complete review of this rulemaking to determine whether or not this rule fully complies with Executive Orders 12866, 13563, and 13579 and OMB Circular A-4.”
No word yet on whether OMB has reviewed the letter or whether it will undertake that review.