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“It’s not just about Benghazi, the IRS, climate change regulations and notifying Congress of prisoner exchanges: the price of government slipping away from consent of the governed” by Clark Judge

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The weekly column from Clark Judge

It’s not just about Benghazi, the IRS, climate change regulations and notifying Congress of prisoner exchanges: the price of government slipping away from consent of the governed

By Clark S. Judge: managing director, White House Writers Group, Inc.; chairman, Pacific Research Institute

 Remember the book, “All Things Great and Small.”  More and more we see that the administration’s bypassing of the legislative process, administrative procedure and established norms of American governance applies to all things prominent and obscure.

 This week headline writers have focused on the White House ignoring Congressional consultation rules in prisoner release and Congressional intent regarding emissions standards and coal.  Before that they were enthralled with political uses of the IRS and snooping on reporters.  Lack of candor about Benghazi is part of this story, too.  So was the falsity, so critical to securing Obamacare’s passage, that if you liked your doctor and health plan, you could keep them.

But the story doesn’t end above the fold.  Sometimes you find it buried deep within the news and in what you’d think would be the most unlikely places.

For example, in late May, Paul Schott Stevens, the head of Investment Company Institute, the trade association of the mutual fund industry, told his annual membership meeting of how the administration is moving to apply the Dodd-Frank act to asset managers, meaning, primarily, mutual funds. The president’s people want to declare some mutual funds “systemically important” under the act.

I will get to what that means in a moment.  But to grasp how far this is from Congress’s purpose, consider that, per the Wall Street Journal (, the bill’s author, former Massachusetts congressman Barney Frank said late last year that regulating mutual funds was not the intent of the law.  As reported, “Mr. Frank told [a meeting of the Clearing House, a banking trade group], “I have not seen the argument made yet to cover’ the ‘very plain-vanilla asset managers.’”

As in other areas of administration overreach, this skirting of Congressional intent and even the plain language of the law has been accompanied by ignoring, or at least finessing, established procedural safeguards.  According to Stevens, speaking of the Financial Stability Oversight Council (FSOC), a Dodd-Frank committee of Federal regulators, on May 19th “the FSOC held a conference at the Treasury Department to help educate members of its various agencies about asset management. Yet weeks ago… the Council was hustling two large mutual fund managers toward designation. In the face of such news… questions have surfaced about the fairness of this whole process.”

The problem here is that, if you own shares in a mutual fund that FSOC declares “systemically important,” investor priorities will have to take a back seat to regulator priorities.  For example, if there is a big drop in the markets, you may want your funds to sell their shares fast and come back after stock prices bottom out.  Yet, regulators typically put a priority on market stability, meaning they want to stop sell-offs, which would leave you exposed, no matter if you agree or not.

Then, too, if your fund has invested in a bank’s stock and the bank has unexpected troubles, your “systemically important” fund could be stopped from selling the shares, again to protect the regulator’s interest in stability, not your safety and returns.

Whatever you think of Dodd-Frank (with Obamacare and Sarbanes-Oxley, it is on my repeal-replace list), the law was intended for bank regulation. Banks have long raised 90 percent and more of their investment capital from borrowing, often short term borrowing.  So when lots of investors want their cash fast, banks must call loans or, if borrowers cannot deliver, collapse. That’s why regulators have been requiring banks to hold more stockholder capital, to make them less vulnerable to runs.  Those capital requirements would apply to “systemically important” mutual funds, too, meaning their investors would receive less back on each dollar they invested.  But mutual funds borrow only about 4 percent of their money. It is mathematically impossible for them to collapse from panicked selling.

As for more than a decade, about half of American households own mutual fund shares.  Most are middle income and use funds for retirement savings. But, as I say, to declare a fund “systemically important” will automatically mean its investors take a back seat to its regulators, meaning the investors’ retirement income will take a hit – receiving nothing in return.

Yes, this issue is one of the obscure ways in which the executive branch and agencies are skirting law and established procedures. I wouldn’t have known about it but for consulting to ICI.  How many more official transgressions lurk far from the headlines? And what price are we all paying for this erosion of government by consent of the governed?


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