Financial Reform's Internationalism

• Jurisdiction: United States,Federal
• Publication year: 2016
• Citation: Vol. 65 No. 5

Financial Reform's Internationalism

David Zaring

FINANCIAL REFORM'S INTERNATIONALISM

David Zaring^*

Abstract

Financial reform has rebalanced the power of international engagement, reducing the role of the President and his diplomats, and increasing that of Congress and independent agencies. In so doing, the reforms have readjusted a balance that many believe was skewed by the government's response to the financial crisis. The international policy of financial reform has doctrinal implications as well: Congress has supplemented traditional international law with an endorsement of international regulatory cooperation. Because of this supplementation, the things that customary international law used to do—in particular enabling international cooperation and creating innovation in human rights—are now being done by financial regulators wielding the power of informal agreements. The privileging of regulatory cooperation, and the entry into human rights through financial regulation, is evidenced by the so-called Conflict Minerals and Resource Extraction Rules that Congress has directed the Securities and Exchange Commission to promulgate.

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Introduction

Financial reform has driven many changes in American governance, and it was compelled in turn, in President Obama's view, by an inability, before and during the financial crisis, to respond to "the speed, scope, and sophistication of a 21st century global economy."¹

So while the recalibration of financial regulation has contained multitudes—in 2010, a supercommittee of federal officials was established to monitor the financial sector,² a financial consumer protection agency was created,³ and banks were precluded from trying to make money in the capital markets on their own accounts,⁴ among many other regulatory efforts⁵ —its potentially most dramatic reform may prove to be the American government's cautious, but wide-ranging, embrace of a reformed global regime to regulate international finance.

The regime moves the equilibrium of the separation of powers in foreign affairs towards congress, rectifying, at least somewhat, a balance that many

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thought was upended during the response to the financial crisis. It also uses the informal way that financial regulatory standards spread across the globe to do the work that customary international law used to do. This Article explores the implications of these reforms and ultimately endorses them; the question is whether they will spread to other areas of regulatory internationalism. The struggle to keep up with the ever-globalizing economy suggests that they might.

The Dodd-Frank Wall Street Reform and Consumer Protection Act⁶ (hereinafter "Dodd-Frank")—the signature domestic statute, passed in 2010, and implemented slowly ever since—is the centerpiece of the reform of the oversight of the financial system. It is the statute that gave regulators new powers to oversee and, if necessary, close large and interconnected banks. It also extended government oversight to the derivatives markets and created a new agency to protect consumers, among other things. As such, it is arguably one of the two most important statutes passed during the Obama Administration.⁷

Dodd-Frank and the agencies charged with implementing it have taken international steps as well; in particular, by embracing "soft law."⁸ Soft law—often, although not exclusively, agreements between regulators in two or more countries—does not create formal legal obligations, but nonetheless contains substantive commitments that the parties are expected to take seriously.⁹

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Because it involves regulators rather than diplomats, soft law broadens the set of American actors who make foreign policy.¹⁰

In an era where Congress has started to take an assertive role in foreign affairs—by, for example, inviting a foreign head of state to address it without presidential consultation or approval¹¹ —financial reform exemplifies another way that Congress can play a role. Congress can make delegations to regulators, and in particular to regulators more likely to be responsive to it, instead of the President.¹² While scholars like Eric Posner and Adrian Vermeule have argued that international relations, particularly in the wake of a crisis, inevitably empower the Executive Branch, financial reform shows how Congress can limit the power of these actors in post-crisis reform legislation, partly by empowering the regulators more responsive to it than to the Executive.¹³ This rebalancing is the critical domestic implication of financial reform's internationalism.

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But that reform has an important implication for international law doctrine, as well. Soft law's partial dislodgment of treaties, driven by the difficulties—particularly in the United States—associated with negotiating and ratifying formal instruments, has been the subject of prior writing by Andrew Guzman and Kal Raustiala, among others.¹⁴ In the wake of the financial crisis, there has been almost no effort, either globally, or in the United States, to create a formal International Financial Organization that might do the work that Congress has directed agencies to do in Dodd-Frank.¹⁵ Treaties are the traditional approach to international governance, but they have been ignored by policymakers when it comes to the problems posed by the globalization of finance—a development that has come to be expected by scholars.¹⁶ The relationship between regulatory cooperation and the treaty has been well documented.¹⁷

Less studied is the way that soft law has displaced functions of customary international law, the other traditional way to make international rules. Specifically, financial reform is displacing two customary international law functions.

First, the new approach to financial regulation has sought to facilitate conversation among international actors and provide them with a platform for greater international cooperation. In doing so, it has replaced the "rules of the road" function of custom. As Senator Jon Kyl, diplomat Douglas Feith, and John Fonte have said, "Americans can benefit from international cooperation that is rooted in countries' widespread acceptance of useful rules of the

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road."¹⁸ Those rules of the road used to be set by customary international law doctrines, such as diplomatic immunity, state responsibility, and others that served to facilitate international cooperation, without requiring substantive commitments. In finance now, it is informal cooperation that is creating the institutions for agreement. Soft law networks of regulators now set the critical terms of domestic financial reform regulation, and international summits by heads of state and finance ministers are the places where the fruits and agendas of that cooperation are set and reviewed.

Second, it has been used as the vehicle for creating innovations in human rights. Human rights innovations have been a second, if controversial, function of customary international law. But financial reform in America includes new human rights commitment set not by claims of custom but by regulatory example meant to be adopted by the rest of the world. In particular, Dodd-Frank requires one of America's financial regulators, the Securities and Exchange Commission (SEC), to privilege international human rights values in a novel way.¹⁹ Its Conflict Minerals Rule requires manufacturers who use resources extracted from war-torn Central Africa to disclose that use, or to disclose the steps taken to ensure that they are not using African resources, in an effort to reduce the funding for civil conflict in the region.²⁰ Dodd-Frank's Resource Extraction Rule, a transparency measure, requires extractive industries such as mining and oil companies to disclose every payment made to a government in a country in which they do extractive business.²¹ Both are controversial—Roberta Romano has argued that they will impose "considerable costs . . . which could well be in a multiple of billions of dollars," despite having "no connection to the financial crisis, the ostensible focus of the legislation."²² Others have wondered why the United States would

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begin a global human rights campaign without requiring other countries to adopt the same rules as a matter of formal law.²³

This function of financial reform's internationalism offers evidence of a shift away from using traditional international law and international diplomacy and towards technocratic, soft law decisions driven by agency agreements and regulations.²⁴ It is a different kind of international governance, but there is no doubt that it has captured the attention of American policymakers.

The changes in the domestic balance of powers in foreign affairs and in the international relevance of customary international law are intertwined. Public international law used to very much be the province of the executive, and turning to different means to effectuate international governance opens gaps for other actors—in this case, financial regulators—to fill.²⁵ The reliance on regulators disempowers the diplomats who, in part, made foreign policy by engaging with the traditional ways that customary international law offered a path for evolution of the international legal system. The turn away from custom and the empowerment of independent agencies that are the critical components of financial reform's internationalism are, in many ways, two sides of one coin that Congress has cashed in an effort to change the balance of power between the branches of government in foreign affairs.

Before proceeding with the argument, and the specifics of how financial reform achieves these goals, some caveats are in order: None of this means that the President has been entirely dispossessed in foreign affairs, and the existence of a soft law alternative to hard international law does not mean that hard international law has no role. Treaties, though hard to ratify, will continue to be...