Regulators this week waded into the increasingly controversial distinction—and often lack thereof—between supervisory guidance and the laws and regulations they support and clarify.

For months, one of the more contentious debates in compliance and legislative circles has been the role of regulatory guidance and a build-up of those documents derisively termed “regulatory dark matter” by critics.

In a standard world, the regulatory process unfolds as follows: a rule is proposed, public comments shape it in accordance with the Administrative Procedures Act, a final regulation is issued, and subsequent guidance helps define the parameters of that rule for those affected.

Critics, however, including Republican legislators and the Trump administration, lament that over time “guidance” has taken on a life of its own and either supplanted rulemaking or wedged resulting rules into previously unintended and unexpected matters.

On Sept. 11, federal banking regulators weighed in on efforts to clarify the role of supervisory guidance. They issued a statement “clarifying the role of supervisory guidance and to describe the agencies’ approach to supervisory guidance.”

The interagency statement—issued by the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency—“confirms that supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance.”

The agencies authoring the clarification, like many of their peers, issue various types of supervisory guidance, including interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions.

In a positive sense, guidance “can outline the agencies’ supervisory expectations or priorities and articulate the agencies’ general views regarding appropriate practices,” they wrote. Supervised institutions, at times, request guidance to provide insight. For examination and enforcement efforts, guidance may help ensure consistency. The advisory warns, however, that supervisory guidance, no matter how helpful or illustrative, does not have the force and effect of law.

The regulators clarified the following policies and practices related to supervisory guidance:

They intend to limit the use of numerical thresholds or other “bright-lines” in describing expectations in supervisory guidance.

Examiners will not criticize a supervised financial institution for a “violation” of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.

During examinations and other supervisory activities, examiners may identify unsafe or unsound practices or other deficiencies in risk management, including compliance risk management, or other areas that do not constitute violations of law or regulation.

In some situations, examiners may reference supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations.

The agencies will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will generally limit such multiple issuances going forward.

Financial regulators will continue efforts to make the role of supervisory guidance clear in their communications to examiners and to supervised financial institutions and encourage supervised institutions with questions about this statement or any applicable supervisory guidance to discuss the questions with their appropriate agency contact.

The agencies may continue to seek public comment on supervisory guidance.

“Seeking public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law,” the regulators wrote. “The comment process helps the agencies to improve their understanding of an issue, to gather information on institutions’ risk management practices, or to seek ways to achieve a supervisory objective most effectively and with the least burden on institutions.”

“We appreciate this effort by regulators to ensure that both banks and examiners have a clear understanding of the appropriate role of guidance in bank supervision. Bankers over the years have raised numerous concerns about the application of guidance in the examination process, and we view this as a positive step towards providing greater clarity.”
Wayne Abernathy, Executive Vice President, American Bankers Association

The American Bankers Association was among those that welcomed the announcement.

“We appreciate this effort by regulators to ensure that both banks and examiners have a clear understanding of the appropriate role of guidance in bank supervision,” executive vice president Wayne Abernathy wrote in a statement. “Bankers over the years have raised numerous concerns about the application of guidance in the examination process, and we view this as a positive step towards providing greater clarity.”

A political battle

Debates over the proper role of guidance have emerged frequently in recent years.

In 2000, the D.C. Circuit Court of Appeals, in Appalachian Power Co. v. EPA, invalidated a guidance document because it took on the character of a law.

“The phenomenon we see in this case is familiar,” the Court wrote. “Congress passes a broadly worded statute. The agency follows with regulations containing broad language, open-ended phrases, ambiguous standards, and the like. Then as the years pass, the agency issues circulars or guidance or memoranda, explaining, interpreting, defining, and often expanding the commands in the regulations.”

“One guidance document may yield another and then another and so on,” it added. “Several words in regulation may spawn hundreds of pages of text as the agency offers more and more detail regarding what its regulations demand of regulated entities. Law is made, without notice and comment, without public participation, and without publication in the Federal Register.”

Back in 2016, Speaker of the House Paul Ryan’s (R-Wisc.) “Better Way” plan for rulemaking reforms urged regulators to “rein in the use of guidance.”

The Treasury Department also took up the cause in an October report that detailed its recommendations for streamlining the U.S. regulatory system.

In October, a seven-page decision by the non-partisan Government Accountability Office (GAO), a Congressional watchdog, addressed whether interagency guidance on leveraged lending, issued jointly by banking regulators, is considered a rule for purposes of the Congressional Review Act (CRA).

Leveraged lending generally encompasses large loans to corporate borrowers for the purposes of “mergers and acquisitions, business recapitalization and financing, equity buyouts, and business expansions.” The guidance outlined the agencies’ minimum expectations on a wide range of topics related to leveraged lending, including underwriting standards, valuation standards, the risk rating of leveraged loans, and problem credit management.

“We concluded that the Interagency Guidance is a general statement of policy and is a rule under CRA, which must be submitted to the Congress for review,” the GAO wrote.

The CRA establishes a process for congressional review of agency rules and establishes special expedited procedures under which Congress may pass a joint resolution of disapproval that, if enacted into law, overturns the rule.

Also in the mix is a petition for rulemaking, filed with the Securities and Exchange Commission on Aug. 7 by the New Civil Liberties Alliance (NCLA). It seeks “regulations prohibiting the issuance, reliance on, or defense of improper agency guidance.”

The NCLA is a non-profit civil rights organization that, in its words, was “founded to defend constitutional rights through original litigation, amicus curiae briefs, and other means.”

In March 2008, Republicans on the House Committee on Oversight and Government Reform made regulatory guidance a centerpiece of their report “Shining Light on Regulatory Dark Matter.”

“Though regulatory guidance does not have the force and effect of law, these lesser-known government documents can have significant effects on the public and can alter the behavior of regulated parties,” the report says. ‘While the Office of Management and Budget has required agencies to maintain a public inventory of significant guidance for more than a decade, many agencies fail to keep a definitive list of significant guidance documents. In many cases, the agencies fail to even identify certain guidance documents as significant in the first place.”

The House Committee requested information from 46 federal agencies on their use of guidance, including how many guidance documents were issued over the prior 10 years. It compiled an initial inventory totaling more than 13,000 guidance documents issued since 2008, “with substantially more documents available on agency websites or online databases.”

Among the conclusions:

The federal government does not maintain a complete inventory of guidance documents.

Agencies generally do not maintain a complete inventory of guidance documents.

Of the 46 agencies that received the Committee’s request for documentation, only a few were able to produce a comprehensive list of guidance documents within two weeks, which showed the vast majority of agencies do not keep a current database of guidance documents.

Agencies are largely not compliant with the Congressional Review Act.

Of the more than 13,000 guidance documents identified for the Committee, only 189 were submitted to Congress and the Government Accountability Office for review under the CRA.

Agencies are not effectively identifying significant guidance documents or submitting all required guidance to the Office of Information and Regulatory Affairs for review.

“The line between regulations and guidance is hazy,” the House report concluded. “Agencies prefer guidance to legislative rules because they are more flexible, easier to promulgate, and can be written in plain language to be more accessible to the average person. However, the question of whether and how often to issue guidance versus a legislative rule is more complex than a simple determination of which is easier.”

“Guidance can place a burden on regulated entities and, in some cases, guidance can be more difficult to understand than the underlying regulation it was intended to clarify, particularly for small entities who may lack the resources to hire compliance professionals,”

Blaine Luetkemeyer (R-Mo.), a member of the House Financial Services Committee, has been among the most vocal critics of how regulators have issued guidance. He praised this week’s announcement on guidance by regulators.

“I’m very pleased that the federal financial agencies have finally taken the first step in drawing the important distinction between rule and guidance, something I’ve pressed them to do for some time. For too long, regulators have inappropriately used guidance as if it had the full force of a formal rulemaking.  We must continue to restore sanity and clarity in the regulatory regime and move away from regulation by enforcement,” he said.

Luetkemeyer says he plans to introduce legislation “to mandate that all guidance issued by federal regulatory agencies feature a disclosure stating the guidance has not gone through the formal rulemaking process and does not have the effect of law.”

Earlier this year, the GAO issued decisions that recent regulatory guidance failed to pass muster because it was, effectively, made up of regulatory demands without the promulgations and reviews of the CRA.

An alternative viewpoint on the guidance dilemma comes from the Consumer Relations Consortium, an association of creditors and debt collectors. This week, it urged the CFPB “to issue letters and opinions as guidance that could be relied on by companies trying to comply with gray areas in the law.”

“[Guidance protects] consumers’ rights, ensures lawful business operations, and addresses ambiguities leading to frivolous litigation, thereby reducing burdens on our courts,” it wrote.