He Who Makes the Rules

By Haley Sweetland Edwards,

Barack Obama’s biggest second-term challenge isn’t guns or immigration. It’s saving his biggest first-term achievements, like the Dodd-Frank law, from being dismembered by lobbyists and conservative jurists in the shadowy, Byzantine “rule-making” process.

In late 2010, Bart Chilton, one of three Democratic commissioners at the U.S. Commodity Futures Trading Commission (CFTC), walked into an upper-floor suite of an executive office building to meet with four top muckety-mucks at one of the biggest financial institutions in the world.

There were a handful of staff members present, but it was a pretty small gathering—one, it turns out, that Chilton would never forget.

The main topic Chilton hoped to discuss that day was the CFTC’s pending rule on what are known as “position limits.” If implemented properly, position limits would put a leash on speculation in the commodities market by making it harder for heavyweight traders at places like Goldman Sachs and JPMorgan Chase to corner a market, make a killing for themselves, and screw up prices for the rest of us. Position limits are also one of many ways to tamp down the amount of risk big institutions can take on, which keeps them from going belly up and minimizes the chance taxpayers will have to bail them out.

The financial institution Chilton was meeting with that day was a big commodities exchange, which is like a stock exchange except that instead of trading stocks they trade derivatives based on the value of actual products, like oil and gas. Chilton wouldn’t say which major commodities exchange he was meeting with that day, but suffice it to say two of the biggest—the Chicago Mercantile Exchange and Intercontinental Exchange—have a lot to lose from federally administered position limits. To them, the more derivatives traded, the better. They’ve been fighting the CFTC’s attempts to establish position limits for years.

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 seemed to promise meaningful reform on this front. The law includes Section 737, which explicitly directs the CFTC to establish position limits and lays out detailed guidelines on how they should do so. “The Commission shall by rule, regulation or order establish limits on the amount of positions, as appropriate,” it reads.

Still, even with the strength of the law behind him, … [t]hey deferred instead to their top lawyer. In the meeting that day, Chilton couldn’t believe what he was hearing. But the executives refused to discuss the matter further.

In September 2012, the U.S. Court for the District of Columbia Circuit overturned the CFTC’s rule. In the decision, the court wrote that the commission lacked a “clear and unambiguous mandate” to set position limits without first demonstrating that they were necessary and appropriate. And with that, more than two years after the passage of Dodd-Frank, there were still no federally administered position limits for any commodities except grain, and the CFTC was back to square one. The muckety-mucks at the exchanges rejoiced.

at least as important to the future of the country and to the president’s own legacy is whether that potentially game-changing legislation he signed in his first term—like the Affordable Care Act and Dodd-Frank, as well as a slew of other landmark bills—is actually implemented at all.

It may seem counterintuitive, but those big hunks of legislation, despite being technically the law of the land, filed away in the federal code, don’t mean anything yet. They are, in the words of one CFTC official, “nothing but words on paper” until they’re broken down into effective rules, implemented, and enforced by an agency. Rules are where the rubber of our legislation hits the road of real life. To put that another way, if a rule emerges from a regulatory agency weak or riddled with loopholes, or if it’s killed entirely—like the CFTC’s rule on position limits—it is, in effect, almost as if that part of the law had not passed to begin with.

As of now, there’s no guarantee that either Obamacare or Dodd-Frank will be made into rules that actually do what lawmakers intended.

There are three main areas on this gauntlet where a rule can be sliced, diced, gouged, or otherwise weakened beyond recognition.

The first is in the agency itself, where industry lobbyists enjoy outsized influence in meetings and comment letters, on rule makers’ access to vital information, and on the interpretation of the law itself.

The second is in court, where industry groups can sue an agency and have a rule killed on a variety of grounds, some of which make sense and some of which most definitely do not.

The third is in Congress, where an entire law can be retroactively gutted or poked through with loopholes, or where an agency can be quietly starved to death through appropriations bills.

And here’s the really alarming part: rules run this gauntlet largely behind closed doors, supervised by people we don’t elect, whose names we don’t know, while neither the media nor great swaths of the otherwise informed public are paying any attention at all. That’s not because we don’t care what happens; we do. After all, millions of us spent the better part of a year closely monitoring the battles to pass Obamacare and Dodd-Frank. Remember? It was high drama! Every detail was faithfully chronicled in front-page headlines and long disquisitions on The Rachel Maddow Show; in countless posts by wonky bloggers, who dissected every in and out, every committee hearing, every new study about the public option or the Volcker Rule.

As of now, roughly two-thirds of the 400-odd rules expected to come from Dodd-Frank have yet to be finalized.

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