Here’s How Financial And Other Regulators Are Issuing Rules Without Writing Them

At the end of June I testified in a U.S. Senate Homeland Security Regulatory oversight subcommittee hearing on Examining the Use of Agency Regulatory Guidance. Federal agencies, it turns out (probably not to your surprise) are now overusing so-called “Guidance Documents” to sneak around the normal written public notice-and-comment rulemaking process set up for agencies to democratically rather than unilaterally issue substantive new regulations (the Administrative Procedure Act of 1946).

Guidance is legal, but had been intended to be interpretive (“interpretative,” actually, in the law); not intended to make new policy or to be legally binding. But things have changed. (Here are my written and oral remarks from the Senate hearing.)

Both Sens. James Lankford (R-Oklahoma) and Heidi Heitkamp (D-North Dakota), who chaired the hearing, have taken an interest in getting a grip on the process — now unfortunately a “black box” — by which agencies like the Department of Labor and the Department of Education decide whether to issue a normal federal regulation, or to “ merely” issue guidance. The latter can affect public policy without allowing appropriate public input.

Last year I took a partial numerical inventory of what I’ve taken to calling ”regulatory dark matter,” but in preparation for this hearing, I was struck by the prominent examples of this phenomenon that sweep across the federal government.

Below is an overview, with links to many, of some conspicuous recent executive and independent agency guidance documents. I list these in part to make the case that the regulatory process is out of Congress’s control now, and Congress had best take its recent Task Force reports (on restoration of congressional powers under Article I, and on economic/regulatory liberalization) quite seriously as campaign season escalates and the state of the economy is debated.

Here we go:

"Housing and Urban Development guidance decreeing landlord and home seller denial of those with criminal records a potential violation of the Fair Housing Act;

The Environmental Protection Agency’s (EPA’s) Clean Water Act interpretive guidance on “Waters of the United States.” This directive took the step of soliciting notice and comment per the APA, though with significant controversy over the agency’s manipulation of endorsement;

The Securities and Exchange Commission’s interpretive “Commission Guidance Regarding Disclosure Related to Climate Change,” on disclosing potential disruption from “significant physical effects of climate change” on “a registrant’s operations and results,” and disclosing international community actions that “can have a material impact on companies that report with the Commission.” The guidance observes that “Many companies are providing information to their peers and to the public about their carbon footprints and their efforts to reduce them” that hints at where matters are headed as likely emphasis moves from actions affecting a company to how a company allegedly affects others.

Commodity Futures Trading Commission “Staff Advisory” guidance on international financial transactions between overseas party “arranged, negotiated or executed” by a U.S. based individual, that was delayed several times (indicating it perhaps should be a commented-upon rule, instead) and said to jeopardize thousands of jobs by potentially sending them offshore.

A flow of Education Department guidance, at the rate of one issuance per business day, imposing new mandates on colleges and schools without going through the notice-and-comment process required by the APA. According to the bipartisan Senate-appointed Task Force on Federal Regulation of Higher Education, “In 2012 alone, the [Education] Department released approximately 270 ‘Dear Colleague’ letters and other electronic announcements.” “Recalibrating regulation of colleges and universities. Exceedingly high-profile, controversial recent guidance has included:

The U.S. Department of Agriculture’s Forest Service’s “Notice of Final Directive” permanent Ecosystem Restoration policy to replace Interim Directive, “Ecological Restoration and Resilience Policy,” in Forest Service Manual (FSM) 2020, providing broad guidance for restoring ecosystems.

Department of Homeland Security guidance to retailers on spotting home-grown terrorists. As DHS Secretary Jeh Johnson put it, “To address the home-grown terrorist who may be lurking in our midst, we must also emphasize the need for help from the public. ‘If You See Something, Say Something’ is more than a slogan. For example, last week we sent a private sector advisory identifying for retail businesses a long list of materials that could be used as explosive precursors, and the types of suspicious behavior that a retailer should look for from someone who buys a lot of these materials.”

The Department of Labor Wage and Hour Division’s blog post and “Administrative Interpretation No. 2015-1” informing the public that most independent contractors are now employees.

The Department of Labor Wage and Hour Division’s “Administrative Interpretation No. 2016-1” asserting a WHD-defined possibility of “joint employment” under the Fair Labor Standards Act on case-by-case basis in horizontal and vertical contracting situations “to ensure that all responsible employers are aware of their obligations.” With this interpretation, according to my colleague Trey Kovacs, the DoL “will hold more employers liable for wage violations against employees they do not directly employ. The enforcement effort will focus on the construction, hospitality, janitorial, staffing agencies, and warehousing and logistics” and potentially “penalize any industry that utilizes contractors and labor suppliers.”

Three Department of Labor guidance documents regarding the Process Safety Management (PSM) standards for hazardous chemicals have been highlighted by Sen. James Lankford (R-Oklahoma) as bringing a range of manufacturers and retailers within the scope of regulation without the opportunity for public comment. A letter to the Labor Department from Lankford noted: “These three guidance documents are expected to dramatically expand the universe of regulated parties, create extreme logistical and financial burdens on regulated parties, and convert flexible recommended practices into mandatory requirements—all without the opportunity for public comment. We therefore ask that OSHA immediately withdraw these memoranda.” Subject matter of the three guidance documents concerned engineering practices, retail exemptions, and chemical concentrations subject to PSM.

In addition to Department of Labor guidance, greater use by the National Labor Relations Board of memoranda that affect non-union employers.

The Equal Employment Opportunity Commission has issued a series of guidance documents, highlighted by the National Federation of Independent Business, on pregnancy discrimination and accommodation in the workplace, credit checks on potential employees, and criminal background checks.

Guidance from the Consumer Financial Protection Bureau in the form of a “Bulletin” on “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” limits the ability of automobile dealers to offer discounts to customers allegedly in the name of credit fairness and eliminating racial bias (“When such disparities exist within an indirect auto lender’s portfolio, lenders may be liable under the legal doctrines of both disparate treatment and disparate impact”). Given the size of the auto lending marketplace this is clearly an economically significant measure that at the very least required a rulemaking rather than guidance, as well as concerns that even the CFPB recognized internally that it was overestimating bias led to bipartisan House of Representatives passage of H.R. 1737 the “Reforming CFPB Indirect Auto Financing Guidance Act” (a Senate version S. 2663 awaits action) to revoke the guidance. The bill would force CFPB “to withdraw the flawed guidance that attempts to eliminate a dealer’s ability to discount auto financing for consumers. The bill also requires the minimal safeguards the agency failed to follow, such as public participation and transparency.”

A claim in the German press, repeated by Reuters and indicated in recent reports regarding a settlement, that the Environmental Protection Agency, in response to automaker Volkswagen’s deploying “defeat device” software to circumvent EPA emissions standards for nitrogen oxides, is influencing that company to build electric cars and electric car charging stations in the United States. One concern for policymakers is to decide how to talk about and treat judgments as regulatory matters, and to recognize when such decrees, penalties aside, will have the effect of improperly influencing the market trajectory of an entire sector.

The Council on Environmental Quality’s Revised Draft Guidance for Greenhouse Gas Emissions and Climate Change Impacts that makes the National Environmental Policy Act a global warming instrument, particularly through federal land management decisions. The guidance is under seemingly perpetual review, but “describes how Federal departments and agencies should consider the effects of greenhouse gas emissions and climate change in their NEPA reviews,” holding that “agencies should consider both the potential effects of a proposed action on climate change, as indicated by its estimated greenhouse gas emissions, and the implications of climate change for the environmental effects of a proposed action,” and expanding upon 2010 draft guidance, “applies to all proposed Federal agency actions, including land and resource management actions.” Elizabeth Lake on the site Law360 asserts that the new draft “appears to push federal agencies to use NEPA to take a more activist stance in reducing GHG emissions”:

[W]hile courts have held that NEPA is a procedural statute, requiring only a “hard look” at environmental impacts (NRDC v. Morton, 458 F.2d 827, 838 (D.C.Cir., 1972)), this CEQ proposed guidance goes well-beyond this doctrine by instructing agencies to use the NEPA process to force the substantive reduction of GHG emissions.

The Department of Transportation’s Federal Aviation Administration June 2016 final rule on drones, “Operation and Certification of Small Unmanned Aircraft Systems,” is highly restrictive, as detailed by my colleague Marc Scribner, requiring line-of-sight and no night-time operations among much else, ignoring the ability of technological and contractual solutions to address risk, and refusing to stand down to local law enforcement solutions. But it also contains declarations from the agency regarding case-by-case waivers, as well as a large quantity of forthcoming guidance, much of which would seem to be economically significant, on issues like: industry best practices; risk assessment; potential guidance on external load operations; guidance associated with not dropping objects in ways that damage persons or property; advisories on training and direction to air traffic control facilities; preflight checks for safe operation; vehicle conditions for safe operations; and guidance “on topics such as aeromedical factors and visual scanning techniques.”

Prior to the guidance-heralding final rule, there had been a Federal Aviation Administration rule interpretation on drones via a “Notice of Policy” that temporarily outlawed commercial activity in violation of the APA, before a reversal by the National Transportation Safety Board. "

Whether or not one favors such interventions, it’s not too much to ask for Congress to pass a law, or at the very least for agencies to follow the rules. Regulatory dark matter is something for Congress to keep an eye on. 

Originally posted to Forbes.