August 22, 2013

CFTC's Distaste for the Administrative Procedure Act

Hester Peirce

Former Senior Research Fellow
Summary

The Commodity Futures Trading Commission has shown its distaste for the Administrative Procedure Act in connection with regulation. The CFTC avoids the procedural safeguards that are part of the rulemaking process by issuing "non-rule rules". These are staff no-action letters, guidance, and other documents that tell industry what to do, just as a rule would, but don't have the benefit of public comment and regulatory analysis. The CFTC is also cutting procedural corners in other areas.

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The Commodity Futures Trading Commission has shown its distaste for the Administrative Procedure Act in connection with regulation. The CFTC avoids the procedural safeguards that are part of the rulemaking process by issuing "non-rule rules". These are staff no-action letters, guidance, and other documents that tell industry what to do, just as a rule would, but don't have the benefit of public comment and regulatory analysis. The CFTC is also cutting procedural corners in other areas.

The agency recently got rid of its administrative law judges and since then has allowed judgment officers to handle responsibilities that formerly were the province of ALJs. Judgment officers are CFTC staffers--not necessarily even lawyers--whose professional future lies in the agency's hands. By contrast, ALJs are trained lawyers, vetted by a separate government agency, who do not answer to the particular agency at which they work. The Administrative Procedure Act designed the ALJ position to be independent of any influence that would bias decisions. A Government Accountability Office (formerly, General Accounting Office) reportexplained the thinking behind the act that started the ALJ system this way:

The purpose of the act was to ensure fairness and due process in federal agency rulemaking and administrative adjudication proceedings and provide those whose affairs are controlled or regulated by federal government agencies an opportunity for a "formal" hearing on the record before an impartial hearing officer or ALJ. The act sought to ensure the ALJs' judicial capability and objectivity by precluding agencies from evaluating the ALJs' performance and by assigning responsibility for determining their qualifications, compensation, and tenure to the U.S. Civil Service Commission, later the Office of Personnel Management (OPM).

In conjunction with eliminating the ALJ positions, the CFTC changed its rules that once required formal decisional proceedings to be conducted by ALJs to now permit judgment officers to conduct them. Earlier this year, the CFTC made additional changes to its rules to give judgment officers expanded discovery powers and the authority to "carry out the same functions as ALJs in certain proceedings to deny, condition, suspend revoke, or place restrictions on registration." In other words, judgment officers--whose incentives are to please their CFTC colleagues--now have power to make decisions that fundamentally affect people's livelihoods. The Commission can review the judgment officer's decision, but more typically the Commission simply adopts the judgment officer's decision as its own without reviewing it. Congress, the Federal Administrative Law Judges Conference, and others have raised concerns about this change.

The agency's rationale was cost-cutting, and the agency cited the elimination of the ALJs as one of its top fiscal year 2012 accomplishments in an April 2013 submission to Congress. Over the years, the ALJs' caseload had dwindled as the agency's enforcement lawyers opted to go to court in most enforcement matters to take advantage of the more favorable discovery rules. The CFTC may have been correct that it did not need two full-time ALJs, but its solution should not have been to simply rewrite its regulations to eliminate the access of CFTC registrants to impartial decision-makers.