## Saturday, May 24, 2014

### Living within the Handbook: One recent example

by Arjun Rajagopal.

We recently ran a workshop for India's financial sector regulators, providing a walk-through of the Handbook on adoption of governance enhancing and non-legislative elements of the draft Indian Financial Code. Despite its catchy title, the Handbook is a serious document, outlining the commitments made by India's financial regulators at the Eighth Meeting of the Financial Stability and Development Council (FSDC).

The Handbook places great emphasis on the role of Boards of regulators:

• Boards are to engage in careful deliberation supported by staff research.
• Proceedings are to be transparent and participatory.
• All decisions are to be clearly communicated through one type of legal instrument.

At the same time Boards are supposed to be responsive and decisive. Taking these requirements together, the implication is that Boards ought to meet more often, and that regulators should make fewer rules. The rules that are made, however, should be detailed and forward-looking, and should derive legitimacy from the fact that the public was consulted as part of the rule-making process.

All very well, we were told. But what does all this look like in action?

For a live example, we might step out of the world of finance for a moment, and look at the contentious and highly technical debate surrounding `net neutrality' in the US. The US Federal Communications Commission (FCC), is the regulator charged with making rules governing the use of the internet, and is in the process of deciding whether it will be permissible for transmission of some users' data to have priority over others'. The issue goes to the heart of the architecture of the internet, and has important implications for rights and commerce in the digital realm. The "Board" of the regulator is made up of five Commissioners; according to the news coverage of the issue, the Commissioners voted 3-2 to open up their proposed rules to extended public debate and commentary. A closer look at this decision, and the public's engagement with the rulemaking process, is a fascinating demonstration of the sound regulatory process in action.

### The Notice

The Commission's decision and the proposed rules were published in the form of a comprehensive Notice of Proposed Rulemaking made available on its website. The document begins with a simply stated question: "What is the right public policy to ensure that the Internet remains open?" This is followed by a detailed treatment of the various issues it has identified, as well as the substance of the proposed rules. The document makes detailed reference to prior proceedings, government reports, academic treaties, and of course to the existing legal and regulatory framework, and relevant case law. It is certainly a lot more detailed than than many of the regulatory documents we work with here in India.

### Detailed dissent

Statements from all five Commissioners have been published alongside the notice. The statements present the Commissioners' own viewpoints and their arguments. Strangely enough, one of the dissenting statements harshly criticizes the detailed, cogent Notice, saying that it is not detailed or cogent enough! The statement articulates substantive disagreements on the legal and economic issues. According to dissenting Commissioner Michael O'Rielly:

...before taking any action on any issue, the Commission should have specific and verifiable evidence that there is a market failure. The Notice does not examine the broadband market much less identify any failures.

Crucially, he also claims that there have been deficiencies in the rulemaking process:

...to say the cost-benefit "analysis" is woefully inadequate is an understatement. The Notice devotes several pages to a wish list of disclosures, reporting requirements, and certifications that will impose new burdens and carry real costs, but may not even be meaningful to end users... However, there is no attempt to quantify and compare the costs of the proposed new requirements against the supposed benefits - just a single paragraph seeking comment on ways to reduce the burdens. Proposed rules should be accompanied by a fulsome cost-benefit analysis that includes a detailed and extensive review of current law, especially as it applies to other federal agencies that we seek to imitate. The Commission's short-shrift approach to cost-benefit analysis cannot continue, and I intend to spend time improving this important function.

Regardless of the actual merits of the argument, it is nice to see a live debate over rulemaking and cost-benefit analysis (Chapter 4 of the beloved Handbook, for those who are following along) being carried out in public by the Board itself.

### Engagement with the public

As with finance, regulation of telecommunications is an area in which sophisticated practitioners and academics have a rich history of commentary and advocacy. Industry groups, as well as advocacy organisations like the Electronic Frontier Foundation pick apart and scrutinise rules and rulings in this sphere. What is most interesting here, is the way that transparency has enabled a broader audience to get into the guts of the debate, nuanced as it is. The tech site "The Verge" has used footage from the open meetings of the Committee to create a video encouraging the public at large to engage directly with the regulator through its public comments submission page. Does this make life miserable for the Commission? Maybe, but this kind of highly public engagement gives disparate and opposing forces a fair chance to make their best arguments.

Background:
Handbook Chapter 4 - Framing Regulations:
Handbook Chapter 7 - Transparency in Board Meetings:

### Conclusion

Justice Srikrishna's Financial Sector Legislative Reforms Commission, which drafted the Indian Financial Code, worked on two tracks. The first element was writing down the market failures in finance which require a government to do something. The second was establishing good governance practices for how financial agencies should work. Both steps are novel by Indian standards. It is, however, quite easy to obtain intuition on how these things actually work by looking at advanced economies, particularly in contentious episodes such as the net neutrality debate.
The working of regulators is not specific to finance; the IFC and the Handbook can easily scale to other regulators.

Please note: LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.