Scott O'Malia, Commodity Futures Commissioner, Seeks To Upend Wall Street Reform

In a signal that partisan squabbling in the nation's capital may be reaching new levels of rancor, a key Republican regulator is pursuing an unusual avenue to overturn a Wall Street reform rule issued by his own agency. Scott O'Malia, one of five commissioners who lead the Commodity Futures Trading Commission, is asking a powerful White House office that has no actual authority over the CFTC to assess his agency's work.

If the Office of Management and Budget were to take O'Malia up on his suggestion, it would radically change the way some federal regulations are written and severely hamper implementation of a host of rules mandated by the 2010 Dodd-Frank Act.

It would also be illegal, according to Dennis Kelleher, president of Better Markets, a nonprofit financial reform advocacy group. Kelleher points out that the CFTC is an independent federal agency exempt from oversight by White House offices in order to avoid political interference in the technical regulatory process.

The 2010 reform legislation tasked the CFTC with a host of new duties, from regulating the derivatives market that almost broke AIG, to cracking down on oil speculation that drives up gas prices, to preventing conflicts of interest that encourage banks to undercut their own clients. O'Malia has been a vocal opponent of these changes, even after helping to secure loopholes that water down the substance of the rules. Consider the CFTC's proposal for the Volcker rule -- a relatively simple concept banning banks from gambling in financial markets with their own money -- which came in at nearly 300 pages, filled with exceptions and exemptions that O'Malia supported. He still opposed the proposal, voting against a measure to accept public comments on it.

Last week, O'Malia wrote a little-noted letter to the OMB asking it to review the cost-benefit analysis that the CFTC had used in writing new rules against Wall Street conflicts of interest. O'Malia contended that his agency had violated OMB standards and two Obama-issued executive orders by failing to adequately consider certain regulatory costs highlighted by financial industry groups.

O'Malia said in his Feb. 23 letter, "I am writing to request that the Office of Management and Budget (OMB) review the cost-benefit analysis" undertaken by the CFTC. "President Obama was very clear in his two Executive Orders that he expected the highest standards of analysis to validate the necessity of government rulemaking to ensure we don't impose undue and unfounded economic burdens on market participants and the public as a whole," he continued in his Feb. 23 letter. "I don't believe the Commission's rulemakings comply with this directive."

As an independent agency, however, the CFTC does not answer to OMB. The Obama administration does not have the authority to approve or reject the CFTC's calculations. And while the president issued executive orders in 2011 urging regulators to avoid issuing or revise overly burdensome rules, neither order applies to O'Malia's request. One executive order does not apply to independent agencies, while another does not apply to cost-benefit analysis.

Moreover, cost-benefit analysis of regulations is a notoriously subjective enterprise. Some shareholder-friendly experts argue that its value lies only in assessing specific companies' burdens, while others believe it should include effects on the broader economy and the environment.

This lack of presidential authority has created tensions between Obama and the independent Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. The administration has urged Fannie and Freddie to provide relief to struggling homeowners, arguing that modifying troubled mortgages would be less costly for taxpayers than foreclosing on homes. But FHFA Director Edward DeMarco has resisted, and Fannie and Freddie are not performing the mortgage modifications.

While such independence at times frustrates presidents, it exists to prevent political pressure from distorting the regulatory process. Like the Securities and Exchange Commission and other independent agencies, the CFTC is run by five commissioners, including at least two Republicans and two Democrats -- a division that ensures rules at least receive input from both parties. Traditionally, commissioners whose side loses a vote may speak their minds, but they do not publicly appeal to the White House for help.

It is Congress that establishes rules for the operation of independent agencies, both in writing the charters for the agencies and in directing them how to write rules. (O'Malia has a great deal of experience on Capitol Hill, having served as an aide to Sen. Mitch McConnell (R-Ky.) and then-Sen. Pete Domenici (R-N.M.) prior to joining the CFTC.) When companies or individuals object to a rule issued by an independent agency, they are also free to challenge it in court.

In a detailed letter of his own, Kelleher of Better Markets, argued that it would be not only illegal for OMB to comply with O'Malia's request, but a procedural nightmare that would create a damaging new precedent for government functionality.

"This attempt to attack the [CFTC] both from within and by enlisting an Executive Branch agency, initiated by a single Commissioner who was on the losing side of a vote, would open up a Pandora's Box of foreseeable and unforeseeable consequences," Kelleher wrote. "At minimum, it would incentivize every dissenting commissioner at any independent agency to seek OMB's help in undermining an agency decision with which they disagreed."

OMB did not immediately return a request for comment.

Many of the most important rules mandated by the 2010 Wall Street reform legislation have yet to be written or implemented.