Last week I moderated a discussion about compliance with the Dodd-Frank Act specifically as it pertains to the oil & gas industry. The event was a tele-conference co-hosted with the energy practice at Deloitte, where we gathered 10 compliance executives from companies both “upstream” (the ones who extract oil and gas from the ground) and “downstream” (the ones who sell it) to talk about their Dodd-Frank compliance efforts so far.

Allow me to share some of the participants' observations, since Dodd-Frank is quickly coming to embody all the practical challenges of modern compliance that drive every risk, audit, and compliance executives crazy.

I've always felt a tinge of sympathy for oil & gas businesses, since many do significant trading in derivative financial instruments as a way to stabilize their costs. That derivative trading, however, is what the Dodd-Frank Act aims to regulate—mostly because of sloppy risk management in the financial sector. The oil & gas guys were sucked into that regulatory black hole along with the banks, and they are none too pleased with the situation.

I'd assumed we would talk quite a bit about all the new Dodd-Frank rules for derivatives trading currently being proposed by the Commodities Futures Trading Commission—rules that rival the federal tax code for mind-numbing complexity. But no! Instead, the participants mostly lamented the more straightforward, universal headaches of the Dodd-Frank Act: whistleblower hotlines, codes of conduct, shareholder rights, and so forth.

The few companies that have started grappling with the CFTC's looming rules are taking a sensible approach. They pull together cross-department committees that try to parse out specific tasks and chores that Dodd-Frank compliance will entail. They try to assign those duties to specific teams: legal, IT, compliance, internal audit. I asked one compliance officer how difficult assigning those duties to specific teams is. First he chucked. “Well, ah...” he said. “Hmmm. It is pretty hard.”

More troubling were the comments from another participant, who has been warning his traders that change is coming. That second participant rightly noted that traders are a news-savvy bunch, and see the paralysis in Washington. They just don't believe the rules will ever come into force; either Congress will amend the law, or someone will haul it into court again. So they're ignoring missives from the compliance department.

Both of those concerns—an inability to understand what the proposed rules mean, and a workforce that doesn't believe the rules will come into force—spring from the same fundamental problem: The Dodd-Frank Act was a poorly written law, and as a consequence regulators are issuing poorly written rules.

You can see the cracks starting to show, really. Consider all those rules the CFTC is issuing for disclosure of derivatives trading. So far the Commission has spelled out codes of conduct for swaps dealers (that is, the big-league derivatives traders that will be subject to the rules), plus record-keeping obligations for swaps dealers, and all sorts of other details—without yet defining who a swaps dealer actually is. That is a tremendously important question, since businesses scoped out of that definition won't need to comply with the CFTC rules. But if the CFTC includes energy traders as swaps dealers, they'll probably sue. If it omits them, others will raise hell that regulators are letting some risk to the financial system go unsupervised as usual.

In other words, we have a beautiful theory (regulate derivatives trading) colliding with ugly fact (no sensible, uniform definition of derivatives trading exists), and nobody wants to face the truth—that perhaps more transparency into derivatives trading isn't possible. At the very least, the idea requires more thought. Maybe we reduce risk here by changing how we compensate traders, or perhaps we even ban certain types of derivative instruments outright.

I have no illusions that reaching those answers would be easy, but they'd more likely be right than the answer regulators are forcing down the throats of compliance departments right now. Today we're in a wait-and-hurry-up world, as compliance departments churn out short-term fixes (“interim solutions,” one executive told me) to rules that aren't even coherent and final yet.

No wonder the traders snicker at all the warnings from compliance, confident that all this will amount to nothing. Traders are experienced bettors, after all—and right now, their cynicism seems like a reasonable bet to me.