Federal regulator gets derivatives advice from industry insiders

Introduction

Like many federal agencies contemplating reform these days, the Commodities Futures Trading Commission is hearing a lot from the industry it regulates.

But executives and lobbyists don’t always have to knock on the commission’s door. Some are already inside.

They belong to the Global Markets Advisory Committee, which was set up by the CFTC to provide it with private-sector expertise. All of the committee’s 19 members are representatives of financial exchanges, investment banks or other industry groups – an imbalance that is coming under fire from a key senator, farm and consumer organizations, and businesses such as airlines that are sensitive to commodity prices.

The committee, which operates below the general public’s radar, is one of hundreds of similar advisory panels throughout government. It is emblematic of the way industry players or technical experts with a vested interest in agency decisions can gain unfettered access to regulators and a platform to advance arguments in Congress.

A 1972 federal law, the Federal Advisory Committee Act, requires advisory committees to be “fairly balanced.”

The global markets committee has the ear of decision-makers at the CFTC, a government agency long viewed as permissive and now at the crux of a crackdown on the obscure world of privately traded derivatives. Those often-speculative insurance contracts wreaked havoc on the ailing financial system.

When the advising group gathers in December it will focus on derivatives reform. The meeting comes as CFTC Chairman Gary Gensler tries to impose oversight on trillions of dollars in bets on future prices of commodities such as oil and wheat, as well as more exotic mortgage debts. Advancing bills in Congress would impose more capital requirements on derivative dealers and move some trades onto open exchanges.

Such efforts don’t appear to mesh with one of the advisory committee’s formal purposes, described in its 2009 annual report, as “avoiding unnecessary regulatory and operational impediments to conducting global business.”

Jill E. Sommers, one of the CFTC’s five commissioners, chairs the advisory committee and chooses its members. A former industry lobbyist herself, Sommers is a Republican recently reappointed by President Obama.

Big banks and investment houses are using the committee “to protect their profits and their dark market activity. They want to have carte blanche – and they look at Jill Sommers as an ally,” said Jim Collura, a lobbyist for the New England Fuel Institute, one of the groups that has complained to Sommers about being excluded from the process.

Sommers did not reply to requests for comment.

The global markets committee, established more than a decade ago, is only one of some 900 formal advisory groups scattered across the government. Altogether, 65,000 committee members counsel more than 55 agencies, the Government Accountability Office said last year. By advising agencies such as the EPA, FDA and Energy Department, they influence standards for food safety, environmental protection and energy use.

Advisory committees can afford their members – often industry players or technical experts with a vested interest in agency decisions – unfettered access to regulators and a platform to advance arguments in Congress. In some cases, agencies have faced legal challenges for ignoring advisory committee recommendations.

“These committees can be really important and have a lot of influence,” said Wake Forest University law professor Sidney Shapiro, a specialist in administrative procedure and regulatory policy. “It’s hard to generalize, but this is cause for worry, and the public interest is disadvantaged.”

The global market committee’s charter requires it to “serve as a channel of communication” that includes “end users most directly involved in and affected by market globalization.” The charter further specifies that “market users” must be members.

But none of the committee’s members represent ordinary consumers, who may face hardships from the effects of speculative commodities trading, whether at the gas pump or from fluctuating prices of electricity. Even so-called end users – major industries such as airlines or power companies that use derivatives to hedge their risk— have no seat at the table.

That soon may change. Last week, the Huffington Post Investigative Fund contacted the CTFC about the committee’s membership. In an e-mail Monday, a spokesman said the agency is “in the process of expanding the committee membership to include end users.” The spokesman declined to specify who may join.

Seeking More Balance

Sommers, the CFTC commissioner and chair of the advisory group, was a top lobbyist for the International Swaps and Derivatives Association, the main trade group representing those working in the $600 trillion-a-year privately negotiated derivatives markets. Sommers’ former boss and current chief executive officer of the swaps trade group, Robert Pickel, is on Sommers’ committee.

Sommers also was a lobbyist for the Chicago Mercantile Exchange, now CME Group, where some derivatives are traded. The exchange’s chief executive and one of its board members also are on Sommers’ committee.

Among the committee’s other members: Richard Berliand, JP Morgan’s worldwide head of futures and options; Bonnie Litt, a managing director of Goldman Sachs; and Robert Klein, managing director and associate general counsel of Citigroup Global Markets. The committee also includes a registered lobbyist, Joanne Medero, who heads government relations and public policy for Barclays Global Investors.

Transcripts from the most recent committee meeting on July 15, 2008 indicate some preference for the status quo. Among other things, the members were discussing how tighter U.S. rules could affect the global market.

“It’s not helpful to have legislation that encumbers the good decision making of the CFTC,” said Craig Donohue, chief executive of the CME Group. Arthur Hahn, a lawyer representing Euronext Liffe, an international derivatives exchange, said “rulemaking tends to be hard and fast.”

Sommers was named to the CFTC in 2007 by George W. Bush and reappointed this summer by President Obama. She has chaired the global advisory committee since February 2008.

Shortly after Sommers’ reappointment, a coalition of multiple interests not represented on her committee – from consumer organizations to ranchers, power companies, and airlines – wrote her a letter complaining that the group was unbalanced. “Our organizations have an interest in seeing its membership diversified to include commodity end-users and consumers,” wrote Collura on behalf of the coalition.

Sen. Maria Cantwell (D-Wash.), agreed that the committee should expand its membership. During Sommers’ most recent confirmation last month, Cantwell extracted a promise from Sommers to include end users before scheduling the advisory panel’s next meeting.

But on Nov. 6, when the CFTC announced the next scheduled meeting for December, there were no additional members.

Pickel, of the International Swaps and Derivatives Association, downplays the committee’s influence. The CFTC “can decide to listen to us or not,” he said. “It’s really just a forum that allows the commission to cast a net to take in views across the marketplace.”

Still, he said, “I wouldn’t be surprised” if the committee added new members.

Serving Out Their Terms

Despite White House rhetoric about minimizing the direct influence of registered lobbyists, efforts at a crackdown have been soft. On Sept. 23, Obama appeared to call for an end to the membership of lobbyists on advisory committees – in the form of an announcement on a White House blog by Norm Eisen, the president’s special ethics counsel. Lobbyists and executives from Boeing, International Paper Co., IBM and 13 other companies and trade organizations quickly complained – and threatened to circumvent the requirement by having their lobbyists simply stop registering.

Obama hasn’t required immediate changes on the advisory committees. He has not issued an executive order, or dispatched an official memorandum to the heads of his agencies – other options available to the nation’s chief executive.

The result is that lobbyists, executives, scientists and others who have a stake in decisions made by the agencies they advise can hold their positions until their terms expire.

“It is the president’s desire that registered lobbyists not be appointed to federal boards and commissions, and that those registered lobbyists currently serving…be allowed to serve out their terms but that they not be reappointed,” noted Robert Flaak, an overseer of the advisory committees at the General Services Administration, in an Oct. 1 “guidance” letter to federal agencies.

Attempts to remedy imbalances in committee membership have foundered in Congress. Among others, Rep. Henry Waxman, the California Democrat who until recently chaired the House government oversight committee, repeatedly has proposed amendments to the 37-year-old advisory committee law. One measure passed the House last year only to fail in the Senate. This year, Waxman is trying again.

The composition and occasional secrecy of advisory committees has weakened the agencies they counsel, argued law professor Shapiro. “You either get bad advice or you’re just cooking the books – allowing special interests to game the process,” he said. Congress, presidents and the courts, he added, “have made it virtually impossible for these agencies to be hard-charging, effective protectors of the public.”