Financial Services Regulations:

Procedures for Reviews under Regulatory Flexibility Act Need to Be Enhanced

GAO-18-256: Published: Jan 30, 2018. Publicly Released: Jan 30, 2018.

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What GAO Found

To comply with the Regulatory Flexibility Act (RFA), agencies generally must assess the rule's potential impact on small entities and consider alternatives that may minimize any significant economic impact of the rule (regulatory flexibility analyses). Alternatively, agencies may certify that a rule would not have a significant economic impact on a substantial number of small entities. GAO found several weaknesses with the analyses of six financial regulators (Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Securities and Exchange Commission, Commodity Futures Trading Commission, and Consumer Financial Protection Bureau) that could undermine the goal of RFA and limit transparency and public accountability, as shown in the following examples.

  • Certifications. In certifications for rules that regulators determined may affect small entities, regulators conducted analyses to support their conclusions. GAO found many analyses across all regulators lacked key information the Small Business Administration's Office of Advocacy and the Office of Management and Budget (OMB) recommend. Missing information included discussions of data sources or methodologies, consideration of broader economic impacts of the rulemaking (such as cumulative economic impacts of regulations), and definitions of the criteria regulators used for “substantial number” and “significant economic impact.”

  • Regulatory flexibility analyses. In many of the initial and final regulatory flexibility analyses that GAO reviewed, financial regulators' evaluation of key components required by RFA—potential economic effects and alternative regulatory approaches—was limited. Most regulators (five of six) also did not disclose data sources or methodologies used for their analyses, as OMB recommends. For most rules GAO reviewed, regulators (five of six) were unable to provide documentation supporting their regulatory flexibility analyses, as OMB recommends, including analyses supporting certification decisions. However, the extent of documentation varied by regulator.

Federal internal control standards state the importance for agency management to establish policies and procedures to achieve objectives. All but one of the financial regulators have guidelines that restate RFA requirements for certification and for preparing regulatory flexibility analyses and provide some information on how to approach these analyses. However, these regulators generally have not developed specific policies and procedures to assist staff in complying with RFA, which may contribute to the weaknesses GAO identified in the analyses. For example, regulators' guidance generally did not include procedures for evaluating a rule's potential economic impact; identifying and assessing regulatory alternatives that could minimize impact on small entities; disclosing methodology and data sources; and creating and maintaining documentation that supports findings. By not developing and implementing comprehensive policies and procedures for RFA analyses, regulators' ability to consistently and effectively meet RFA objectives may be limited.

Why GAO Did This Study

Since the 2007–2009 financial crisis, federal financial regulators have issued hundreds of rules to implement reforms intended to strengthen the financial services industry. Financial regulators must comply with rulemaking requirements such as RFA when drafting and implementing regulations. Congress included a provision in statute for GAO to study these financial services regulations annually.

This annual report examines the extent to which and how financial regulators performed required RFA analyses and established policies and procedures for complying with RFA requirements, among other objectives. GAO reviewed the RFA section of financial regulators' Federal Register notices of rulemaking, related internal workpapers, and policies and procedures for conducting RFA analyses. GAO also determined the extent to which regulators' analyses reflected RFA requirements, guidance issued by the Office of Advocacy, and OMB guidance on regulatory analysis. GAO's review covered certifications in 66 final rules and regulatory flexibility analyses in 39 proposed and final rules.

What GAO Recommends

GAO is making a total of 10 recommendations among the six financial regulators reviewed, including that regulators develop and implement specific policies and procedures for consistently complying with RFA requirements and related guidance for conducting RFA analyses. Five agencies generally agreed with the recommendations and one did not provide written comments.

For more information, contact Lawrance Evans, Jr. at (202) 512-8678 or evansl@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In June 2019, FDIC staff told us they developed and implemented specific policies and procedures for how FDIC will consistently comply with the RFA requirements and key aspects of Office of Advocacy and OMB guidance in December 2018. The new policies and procedures describe how FDIC will (1) document compliance with RFA requirements, (2) disclose methodology and data sources of economic and RFA analyses, and (3) consider the economic impact on small entities. These RFA policies and procedures will provide specific direction to rulemaking staff that will help to ensure that FDIC consistently and fully implements RFA requirements. By helping to ensure consistent compliance with the RFA requirements, the procedures will help FDIC to ensure that it is appropriately considering and minimizing impacts on small entities during and after agency rulemakings.

    Recommendation: The Federal Deposit Insurance Corporation (FDIC) should develop and implement specific policies and procedures for how it will consistently comply with RFA requirements and key aspects of Office of Advocacy and OMB guidance that include the following three elements: (1) processes for creating and maintaining documentation sufficient to support analysis of economic impact and alternatives; (2) processes for disclosing the methodology--including criteria for assessing significant economic impact and substantial number of small entities--and data sources of economic analysis supporting certification determinations and regulatory flexibility analyses; and (3) processes for considering to the extent practicable a rule's potential economic impacts on small entities, including for evaluating broad economic impacts of regulations in certification determinations and assessing alternatives that could minimize impact on small entities. (Recommendation 1)

    Agency Affected: Federal Deposit Insurance Corporation

  2. Status: Closed - Implemented

    Comments: In June 2019, FDIC staff told us that they met with Small Business Administration (SBA) Office of Advocacy staff in April 2018, together with Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency staff. In that meeting, the agencies provided a detailed comparison of the EGRPRA process to the section 610 requirements. SBA did not raise any significant concerns with how the agencies are using the EGRPRA process to satisfy the section 610 requirements. Based on this meeting, FDIC determined that it has been meeting section 610 requirements and therefore taking appropriate steps to achieve the small-entity burden reduction that the statute seeks to ensure.

    Recommendation: FDIC should coordinate with the Office of Advocacy to determine whether the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) review process satisfies the requirements of section 610 and, if not, what steps should be taken to align the process with section 610 requirements. If additional actions are needed, FDIC should (1) develop and implement specific policies and procedures for performing section 610 reviews, including processes for determining which rules require review, posting notices of upcoming reviews in the Federal Register, and maintaining documentation supporting the analysis and conclusions of RFA-required considerations; and (2) publicly disclose the reviews, or summaries of the reviews, with the basis for any conclusions. Such disclosure could include publishing results as part of the EGRPRA report, in the Federal Register, or on the agency's website. (Recommendation 2)

    Agency Affected: Federal Deposit Insurance Corporation

  3. Status: Closed - Implemented

    Comments: In June 2019, OCC officials told us that they made revisions to two sets of documented procedures to address this recommendation. First, in June 2018, OCC revised its rulemaking procedures to require Policy Analysis Division staff to (1) create and maintain documentation to support analyses of alternatives that could minimize impact on small entities, (2) disclose data methodology and sources of economic analysis supporting certification determinations and regulatory flexibility analyses, and (3) follow processes for considering to the extent practicable a rule's potential economic impacts on small entities. Second, in June 2018, OCC revised its Economics Department Policy Analysis Division's rulemaking procedures guide to comply with RFA requirements, including OCC reviews of proposed and new rules that could have a significant economic impact on small entities. These RFA procedures will provide specific direction to rulemaking staff that will help to ensure that OCC consistently and fully implements RFA requirements.

    Recommendation: The Office of the Comptroller of the Currency (OCC) should develop and implement specific policies and procedures for how it will consistently comply with RFA requirements and key aspects of Office of Advocacy and OMB guidance that include the following three elements: (1) processes for creating and maintaining documentation sufficient to support analysis of alternatives that could minimize impact on small entities; (2) processes for disclosing the methodology--including criteria for assessing significant economic impact and a substantial number of small entities--and data sources of economic analysis supporting certification determinations and regulatory flexibility analyses; and (3) processes for considering to the extent practicable a rule's potential economic impacts on small entities, including for evaluating broad economic impacts of regulations in certification determinations and assessing alternatives that could minimize impact on small entities. (Recommendation 3)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  4. Status: Closed - Implemented

    Comments: In June 2019, OCC staff told us that they met with the Small Business Administration (SBA) Office of Advocacy staff in April 2018, together with Federal Deposit Insurance Corporation and Board of Governors of the Federal Reserve System staff. In that meeting, the agencies provided a detailed comparison of the EGRPRA process to the section 610 requirements. SBA did not raise any significant concerns with how the agencies are using the EGRPRA process to satisfy section 610 requirements. Based on this meeting, OCC determined that it is meeting section 610 requirements and therefore taking appropriate steps to achieve the small-entity burden reduction that the statute seeks to ensure.

    Recommendation: OCC should coordinate with the Office of Advocacy to determine whether the EGRPRA review process satisfies the requirements of section 610 and, if not, what steps should be taken to align the process with section 610 requirements. If additional actions are needed, OCC should (1) develop and implement specific policies and procedures for performing section 610 reviews, including processes for determining which rules require review, posting notices of upcoming reviews in the Federal Register, and maintaining documentation supporting the analysis and conclusions of RFA-required considerations; and (2) publicly disclose the reviews, or summaries of the reviews, with the basis for any conclusions. Such disclosure could include publishing results as part of the EGRPRA report, in the Federal Register, or on the agency's website. (Recommendation 4)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  5. Status: Open

    Comments: In June 2019, Federal Reserve staff told us that they continue to review their policies and procedures to ensure compliance with RFA requirements. While Federal Reserve staff said that they use an RFA handbook developed by the SBA Office of Advocacy to support their analyses, the Federal Reserve has not made changes to its policies and procedures based on our recommendations. Until the Federal Reserve develops and implements RFA policies and procedures consistent with the recommendation, it remains open.

    Recommendation: The Federal Reserve should develop and implement specific policies and procedures for how it will consistently comply with RFA requirements and key aspects of Office of Advocacy and OMB guidance that include the following three elements: (1) processes for creating and maintaining documentation sufficient to support analysis of economic impact and alternatives; (2) processes for disclosing the methodology--including criteria for assessing significant economic impact and a substantial number of small entities--and data sources of economic analysis supporting certification determinations and regulatory flexibility analyses; and (3) processes for considering to the extent practicable a rule's potential economic impacts on small entities, including for evaluating broad economic impacts of regulations in certification determinations and assessing alternatives that could minimize impact on small entities. (Recommendation 5)

    Agency Affected: Federal Reserve System

  6. Status: Closed - Implemented

    Comments: In June 2019, Federal Reserve staff told us that they met with the Small Business Administration (SBA) Office of Advocacy staff in April 2018, together with Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency staff. In that meeting, the agencies provided a detailed comparison of the EGRPRA process to the section 610 requirements. SBA did not raise any significant concerns with how the agencies are using the EGRPRA process to satisfy the section 610 requirements. Based on this meeting, the Federal Reserve determined that it has been meeting section 610 requirements and therefore taking appropriate steps to achieve the small-entity burden reduction that the statute seeks to ensure.

    Recommendation: The Federal Reserve should coordinate with the Office of Advocacy to determine whether the EGRPRA review process satisfies the requirements of section 610 and, if not, what steps should be taken to align the process with section 610 requirements. If additional actions are needed, the Federal Reserve should (1) develop and implement specific policies and procedures for performing section 610 reviews, including processes for determining which rules require review, posting notices of upcoming reviews in the Federal Register, and maintaining documentation supporting the analysis and conclusions of RFA-required considerations; and (2) publicly disclose the reviews, or summaries of the reviews, with the basis for any conclusions. Such disclosure could include publishing results as part of the EGRPRA report, in the Federal Register, or on the agency's website. (Recommendation 6)

    Agency Affected: Federal Reserve System

  7. Status: Open

    Comments: In June 2019, CFPB staff told us that they are in the process of amending their regulatory analysis policy document to address this recommendation. They plan to make changes that will address the three elements of the recommendation. Until CFPB finalizes this document, this recommendation remains open.

    Recommendation: The Consumer Financial Protection Bureau should develop and implement specific policies and procedures for how it will consistently comply with RFA requirements and key aspects of Office of Advocacy and OMB guidance that include the following three elements: (1) processes for creating and maintaining documentation sufficient to support analysis of alternatives that could minimize the impact on small entities; (2) processes for considering to the extent practicable a rule's potential economic impacts on small entities, including for evaluating broad economic impacts of regulations in certification determinations and assessing alternatives that could minimize impact on small entities; and (3) in developing policies and procedures for section 610 reviews, include processes for determining which rules require review, posting notices of upcoming reviews in the Federal Register, maintaining documentation supporting the analysis and conclusions of RFA-required considerations, and establishing procedures for publicly disclosing the review or summaries (such as in the Federal Register or on the agency's website). (Recommendation 7)

    Agency Affected: Consumer Financial Protection Bureau

  8. Status: Open

    Comments: In June 2019, CFTC staff told us that they formed a working group to enhance its implementation of RFA requirements. While this working group has begun drafting compliance procedures for RFA reviews, the procedures are incomplete and CFTC staff said it will have to finish updating the "small entity" definition before it can complete these procedures. CFTC staff told us that the working group has focused much of its work on updating the agency's definition of "small entity" because the definition was outdated. The identification of "small entity" is an important preliminary step for RFA analysis. CFTC staff does not expect to publish a proposal to amend the "small entity" definition until the summer 2020. Until CFTC finalizes and implements the new procedures for RFA reviews, this recommendation remains open.

    Recommendation: The Commodity Futures Trading Commission should develop and implement specific policies and procedures for how it will consistently comply with RFA requirements and key aspects of Office of Advocacy and OMB guidance that include the following four elements: (1) processes for creating and maintaining documentation sufficient to support analysis of economic impact and alternatives; (2) processes for disclosing the methodology--including criteria for assessing significant economic impact and a substantial number of small entities--and data sources of economic analysis supporting certification determinations and regulatory flexibility analyses; (3) processes for considering to the extent practicable a rule's potential economic impacts on small entities, including for evaluating broad economic impacts of regulations in certification determinations and assessing alternatives that could minimize impact on small entities; and (4) in developing policies and procedures for section 610 reviews, include processes for determining which rules require review, posting notices of upcoming reviews in the Federal Register, maintaining documentation supporting the analysis and conclusions of RFA-required considerations, and establishing procedures for publicly disclosing the review or summaries (such as in the Federal Register or on the agency's website). (Recommendation 8)

    Agency Affected: Commodity Futures Trading Commission

  9. Status: Closed - Implemented

    Comments: In March 2019, SEC staff provided GAO with a memo documenting actions SEC had taken to develop and implement policies and procedures to comply with RFA requirements. We reviewed the new RFA policies and procedures, and supporting documentation to comply with RFA requirements in SEC's rulemaking process, which describe important elements of RFA analysis, including processes for (1) documentation on compliance with RFA requirements, (2) disclosing methodology and data sources of economic and RFA analyses, (3) considering the economic impact on small entities, and (4) performing section 610 reviews, including which rules to review and posting those reviews in the Federal Register. By developing policies and procedures that provide specific direction to rulemaking staff, SEC can better ensure consistent and complete implementation of RFA requirements and more fully realize the RFA goal of appropriately considering and minimizing impacts on small entities during and after agency rulemakings.

    Recommendation: The Securities and Exchange Commission (SEC) should develop and implement specific policies and procedures for how it will consistently comply with RFA requirements and key aspects of Office of Advocacy and OMB guidance that include the following four elements: (1) processes for creating and maintaining documentation sufficient to support analysis of economic impact and alternatives; (2) processes for disclosing the methodology--including criteria for assessing significant economic impact and a substantial number of small entities--and data sources of economic analysis supporting certification determinations and regulatory flexibility analyses; (3) processes for considering to the extent practicable a rule's potential economic impacts on small entities, including for evaluating broad economic impacts of regulations in certification determinations and assessing alternatives that could minimize the impact on small entities; and (4) processes for performing section 610 reviews, including determining which rules require review, posting notices of upcoming reviews in the Federal Register, and maintaining documentation supporting the analysis and conclusions of RFA-required considerations. (Recommendation 9)

    Agency Affected: United States Securities and Exchange Commission

  10. Status: Open

    Comments: In March 2019, SEC provided us with supplemental policies and procedures it developed for compliance with the Regulatory Flexibility Act (RFA), including section 610 reviews. The procedures require staff to publish on SEC's website a notice that section 610 reviews have been completed and, if the agency plans any further actions, a published RFA agenda would so indicate. Although these notices communicate with interested entities about the status of ongoing as well as completed section 610 reviews, they will not include any details about the basis for SEC's conclusions during the review. Therefore, they do not full implement GAO's recommendation, which remains open.

    Recommendation: SEC should publicly disclose its section 610 reviews, or summaries of the reviews, with the basis for any conclusions. Such disclosure could include publishing results in the Federal Register or on the agency's website. (Recommendation 10)

    Agency Affected: United States Securities and Exchange Commission

 

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