GAO faults regulators for falling behind on analyzing impact of rules on small entities

Financial regulators should develop and implement specific policies and procedures to consistently comply with mandates from Congress for analyzing the impact of regulations on smaller institutions, according a report issued Tuesday.

In its report, the Government Accountability Office (GAO) said it found weaknesses with the analyses of six financial regulators that could “undermine the goal of the Regulatory Flexibility Act (RFA)” and “limit transparency and public accountability.” The report makes 10 recommendations to financial regulators.

The regulators the agency studied are: the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp. (FDIC), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Consumer Financial Protection Bureau (CFPB).

The congressional watchdog said it found many analyses across all regulators lacked key information that the Small Business Administration’s Office of Advocacy and the Office of Management and Budget (OMB) recommend for certifying rules as complying with the RFA.

Among the missing information: 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.”

In addition, GAO said, 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,” the agency stated. “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.”

GAO noted that the RFA was passed by Congress response to concerns about the effect federal regulations can have on small entities. The RFA requires regulatory agencies to provide an assessment – known as a regulatory flexibility analysis – of a rule’s potential impact on small entities and consider alternatives that may reduce burden. Alternatively, the GAO said, agencies may certify that a rule would not have a significant economic impact on a substantial number of small entities.

Among the 10 recommendations made:

  • The FDIC, OCC and CFPB should develop and implement specific policies and procedures for how they will consistently comply with RFA requirements and key aspects of Office of Advocacy and OMB guidance.
  • The Federal Reserve, FDIC and OCC should coordinate with the Office of Advocacy to determine whether the Economic Growth and Regulatory Paperwork Reduction Act (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.

GAO said it selected the six agencies for inclusion in this study because they reflected a broad range of regulatory missions, including the safety and soundness of depository institutions, securities and derivatives markets oversight, and consumer protection. Other financial regulators include (but which were not studied) the National Credit Union Administration (NCUA), the Farm Credit Administration (FCA), and the Federal Housing Finance Agency(FHFA).

Financial Services Regulations: Procedures for Reviews under Regulatory Flexibility Act Need to Be Enhanced