Would 'you-snooze-you-lose' provisions get agencies to finish rules they don't start?

Bloomberg News

WASHINGTON — One of the less-discussed problems in the banking administrative state is the problem of Congress instructing agencies to issue rules on a particular subject by a predetermined date and those regulators just not doing it.

One classic — and, indeed, enduring — example of this is Section 956 of the Dodd-Frank Act, whereby "the appropriate federal regulators jointly shall prescribe regulations or guidelines to require each covered financial institution to disclose to the appropriate federal regulator the structures of all incentive-based compensation arrangements." That disclosure is meant to ensure that no compensation package offered to executives is either excessive or "could lead to material financial loss."

The reason this provision made it into law with such specificity is because executive compensation was one of the many nodes of the cascading failure that was the Great Financial Crisis. Many C-suite executives of the banks that had run aground were paid largely with stock packages, which created an incentive for those executives to concentrate their energies on maximizing share price rather than on the fundamentals — like solvency.

The statute says these rules shall be promulgated within nine months of enactment of the law. By my count, that makes the rule 13 years and two days past due — and despite a recent rash of bank failures that briefly brought the issue of executive compensation into the spotlight, the rule appears to remain on the back burner.

This isn't the only example of this kind of regulatory foot-dragging out there. The Consumer Financial Protection Bureau famously took its time in issuing a small-business data collection rule required under Section 1071 of Dodd-Frank, and ultimately was ordered to do so as part of a legal settlement with community advocates in 2020. A more distant example is a requirement in the Home Ownership and Equity Protection Act of 1994 that required regulators to develop rules governing the issuance of subprime mortgages — a rule that was ultimately completed in 2007, decidedly too late.

In a recent podcast, former Treasury official Aaron Klein and former Federal Housing Finance Agency Director Mark Calabria were discussing what to do about regulators who just don't do their homework, and Calabria suggested expanding legal standing to sue might help.

"I think we just have a cultural sense of regulators thinking that statutes are menus where they get to choose what they want to do," Calabria said. "How do you create avenues for people to sue because regulators haven't done their jobs? That's the tough thing. For most things, there's no standing other than if it's a bank with a bank regulator, and obviously banks aren't going to sue to force their regulators to do a compensation rule."

That's a good point — indeed, the force that ultimately got the CFPB to the drawing board for the Small Business Data rule was a lawsuit. But the threat of court challenges may not be enough to get these balls rolling, especially if the agency ends up getting sued anyway when it implements the rule as required. And I'm also not sure that more litigation ends up leading to better policy.

Klein had another suggestion, which is that when Congress issues a statutory provision mandating regulation it also includes a clause stating that if the agency or agencies won't meet the deadline to act, the duty to issue the rule is automatically transferred to some other regulator who will — call it a "you-snooze-you-lose" provision.

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"You take it from them," Klein said. "You give them a date, if a regulator doesn't meet [that deadline] it goes to the Treasury Secretary … or the [Financial Stability Oversight Council] or however you want to do it. But if you want to light a fire under a regulator to get something out, take their authority away if they fail to accomplish it. You'll find a lot gets done — maybe it's not good, but it'll get done."

I think there's promise to this approach, but let's think it through. There is a Federalist Papers-esque checks and balances vibe to the idea that I think can be an effective cudgel against inaction. Regulators hate ceding authority to other regulators — one need look no further for proof of this than the turf war between the Commodity Futures Trading Administration and the Securities and Exchange Commission over whether cryptocurrency is a commodity or a security. 

But making that threat maximally effective might require making the authority ceded more significant than just the rule in question. If I don't clean my basement because I don't want to, taking the job of cleaning my basement away from me and giving it to someone else may not incentivize me to act — but taking my basement away certainly would.

There's also the problem of multiagency joint rules — if five regulators have to put out a rule together, as is the case with executive compensation, all five agencies may not be equally derelict in their duty, but there isn't an easy way to account for that at the statutory level. And if you take the authority away from one regulator for failure to act and hand it to another, what happens if they also fail to act? And what happens if this results in more divergent and idiosyncratic authorities accumulating at one agency, as has famously been the case at the Fed? 

Congress doesn't necessarily have to answer all of these questions to try something new — there are very few solutions in government that don't create more problems. But there should be consequences to regulatory inaction, and the existing suite of consequences isn't getting the job done.