WALL STREET JOURNAL
February 21, 2012
By VICTORIA MCGRANE And JON HILSENRATH

The Federal Reserve has operated almost entirely behind closed doors as it rewrites the rule book governing the U.S. financial system, a stark contrast with its push for transparency in its interest-rate policies and emergency-lending programs.

While many Americans may not realize it, the Fed has taken on a much larger regulatory role than at any time in history. Since the Dodd-Frank financial overhaul became law in July 2010, the Fed has held 47 separate votes on financial regulations, and scores more are coming. In the process it is reshaping the U.S. financial industry by directing banks on how much capital they must hold, what kind of trading they can engage in and what kind of fees they can charge retailers on debit-card transactions.

The Fed is making these sweeping changes—the most dramatic since the Great Depression—almost completely without public meetings. Rather than discussing rules and voting in public, as is done at other agencies with which the Fed often collaborates, Fed Chairman Ben Bernanke and the Fed's four other governors have held just two public meetings since July 2010. On 45 of 47 of the draft or final regulatory measures during that period, they have emailed their votes to the central bank's secretary.

The votes, in turn, weren't publicly disclosed until last week, after The Wall Street Journal requested the information for this article. On Feb. 14, for the first time, the Fed posted on its website the names of the Fed governors voting for or against each closed-door regulatory action on Dodd-Frank since July 2010, when that law was enacted.

The Fed isn't breaking any laws by not having open meetings. But it is breaking from a long tradition of airing regulatory matters at open meetings. Bipartisan critics—including lawmakers and former regulators—say the Fed's cloistered approach deprives the public of insight into how rules are being written and makes it harder for Congress and others to hold them accountable for their decisions.

"People have a right to know and hear the discussion and hear the presentations and the reasoning for these rules," Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corp., said in an interview. "All of the other agencies which are governed by boards or commissions propose and approve these rules in public meetings," she said. "I think it would be in the Fed's interest to do so as well."

The Fed's recent approach to writing financial regulations is very different from its practice in the 1980s and 1990s, when it held as many as 31 public meetings a year, according to data provided by the Fed. The governors publicly discussed not only regulations, but also obscure matters, like how much to spend on portraits of former chairmen. That began slowing in the late 1990s and fell sharply in the 2000s, and now such meetings rarely occur.

Fed officials contend they allow plenty of sunlight into their regulatory deliberations, but open meetings, which tend to be scripted and are sometimes perfunctory, don't always add value to the process. Ever-growing demands on governors' time has made it harder to coordinate schedules to allow for frequent meetings than in past decades, they add.

The Fed's closed-door process has obscured internal disagreement on at least one big issue. Last October, Fed Governor Sarah Bloom Raskin dissented when the Fed issued a proposed regulation implementing the controversial Volcker rule, which would restrict U.S. banks from making bets with their own capital.

Ms. Raskin's dissent, which she cast by email, wasn't publicly disclosed by the Fed until Feb. 14. Neither she nor the central bank has publicly explained her reasons for dissenting to the draft rule, which the Fed is writing with several other regulators.

Ms. Raskin said in an interview that she was concerned that the draft rule, mandated by Dodd-Frank and named for former Fed Chairman Paul Volcker, would be too unwieldy for banks to comply with and for regulators to enforce. She also worried that some of the exemptions were written too broadly. She said she had ample opportunity to talk through her views during the drafting process.

Her dissent is significant because regulators are still writing the rule and her views could inform banks, industry groups and others as they engage with the Fed to shape the measure, say veterans of the regulatory process. The deadline for comments on the Volcker proposal was Feb. 13, however, so it is too late for letters to be informed by her dissent. "I would have liked to have heard that discussion," said Sen. Bob Corker (R., Tenn.), a leading critic of the Volcker rule, when informed of Ms. Raskin's dissent.

The official directing the Fed's rule-writing effort, Daniel Tarullo, a governor appointed by President Barack Obama, said the central bank should have disclosed Ms. Raskin's dissenting opinion in the Volcker rule. "I can't think of any justification" for not disclosing Ms. Raskin's dissent, he said in an interview before the vote tallies were posted on the website. "When there is a dissent from any vote it has got to be noted," he said, and the practice of not publishing such internal dissents "has got to be changed in my view."

More broadly, Mr. Tarullo said open meetings aren't always the most effective means to increasing public understanding, and they aren't a gauge of regulators' work. "You can have a scripted meeting that does not show any engagement at all," Mr. Tarullo said.

Open meetings could also strain the already busy schedules of top Fed officials. The Fed currently has 250 separate rule-writing projects under way. "Compared to other waves of rule-making this is a tsunami," said John Weinberg, head of research at the Federal Reserve Bank of Richmond. The seven-member Fed board currently has two vacancies.

Mr. Tarullo said he has asked for open meetings on several final rules. A request from any governor means an open meeting must be held.

The Fed's method of writing rules for the financial industry contrasts with the way its policy committee—the Federal Open Market Committee, comprising the seven Fed governors and five Reserve Bank presidents—sets interest rates. Although their sessions are closed to the public, that group has regularly scheduled meetings on interest rates and in-person votes, intense discussion and prompt disclosure about how individuals voted and the reasons for any dissent. Mr. Bernanke has pushed the Fed to be more open on interest-rate policy, by making public its internal economic and interest-rate projections. He holds quarterly news conferences to explain the committee's decisions and thinking.

"As an agent of the government, a central bank must be accountable in the pursuit of its mandated goals, responsive to the public and its elected representatives, and transparent in its policies," Mr. Bernanke said about monetary policy-making in a 2010 speech.

Federal Reserve officials argue that their rule-writing process is already transparent. The Fed generally gives the public 60 to 90 days to comment on its proposed measures, longer than in the past. Banks and others interested in Fed rule-writing say they have frequent closed-door meetings with Fed officials to express their views. Participants in those meetings are disclosed on the Fed's website, a new practice adopted after the passage of Dodd-Frank.

Fed officials say they are called to testify before Congress and are grilled on the status of controversial regulations as they are writing them.

Mr. Tarullo said the Fed has been more transparent on regulatory issues in other ways. For instance, in 2009 the Fed disclosed details of its findings from "stress tests" on the nation's largest banks to determine their ability to withstand severe strains in the financial system. It plans to publish results from tests being done this year, too.

The Fed's approach to regulatory rule-writing is nevertheless striking in the wake of demands by Congress and the Supreme Court in 2010 that forced the Fed to disclose which banks got its emergency loans during the financial crisis.

And it differs from that of other top financial regulators. The Federal Deposit Insurance Corp., the Securities and Exchange Commission and the Commodity Futures Trading Commission, each governed by a board or a commission, have all held open meetings on most of the draft and final rules they have considered, at times with debate and public dissent, according to their websites and agendas.

Some Fed officials privately complain that the more public rule-writing approach at other agencies is often inefficient. The challenge in scheduling meetings, they say, is complicated by the fact that many rules are being written by several agencies at the same time.

"For [the Fed] to be accountable, they've got to air and discuss and debate their viewpoints," said Sen. Richard Shelby of Alabama, the top-ranking Republican on the Senate Banking Committee, who supported stripping the Fed of its supervisory authority when Congress was writing Dodd-Frank. The Fed fought hard to keep its powers. "The Fed's record shows, among other things, that it's not infallible. Look at the housing crisis," he said.

Under federal "sunshine" laws, no more than three Fed board members can meet without formal notice and opening the gathering to the public, unless it meets one of several exemptions. For instance, meetings on the supervision of banks and other financial institutions for which the Fed is responsible can be closed because the discussion includes confidential information about specific companies. But the Fed governors don't regularly meet for discussions on supervisory matters either.

The governors do meet on monetary policy—another exemption from sunshine laws. Out of 61 closed-door meetings held since the start of 2010, the vast majority have been on that topic. They have met 10 times over the same period to discuss supervisory issues, according to an analysis of agendas on the Fed website.

Michael Bradfield, who served as Fed general counsel between 1981 and 1989, said he is troubled by the infrequency with which the Fed board convenes meetings, closed or open, to consider supervisory matters. The governors are in effect delegating much of their supervisory authority to their staff, he said.

"Governors have the responsibility and they should be actively involved and not merely looking at staff documents in their offices," Mr. Bradfield said. He recalled numerous occasions when he was at the Fed and then-Chairman Volcker changed the board's view on an issue through "vigorous discussion" at almost weekly meetings devoted to bank supervisory issues.

"It makes a big difference if you sit down at a table and discuss things," he said.

The Fed's rule-writing process works like this: Teams of Fed staff write long initial drafts of rules and send governors summaries called "term sheets." With those term sheets as a guide, Fed staff meet with governors, usually one at a time, to present options and solicit feedback. For rules dealing with the biggest banks, Mr. Tarullo generally decides when a rule is ready to go to the full board for a vote. The Fed has approved 47 regulatory measures since late 2010, according to law firm Davis Polk & Wardwell LLP.

The Volcker rule vote was the only closed-door vote in which a governor formally dissented, according to Fed records. But some observers believe open meetings could reveal more nuanced differences. "Do they all have the same view every day? Obviously not. Do they have the same approach to economics? Obviously not," said Mr. Shelby, the Alabama senator.

Other regulators have recently moved toward greater transparency. The CFTC, for instance, has publicly discussed more than 90% of the 60 or so proposed Dodd-Frank rules it has issued and all but a handful of the final rules, Gary Gensler, the agency's chairman estimated. That is after years of practically no open meetings before Mr. Gensler arrived in 2009.

The CFTC also has convened more than a dozen public roundtables—several with the SEC—in which staff and market participants debate aspects of major rule-making, all streamed live to the public via the Internet.

The FDIC has opened up meetings of an advisory committee created to counsel the agency on the new power to seize and dismantle large, failing financial firms, a central plank of Dodd-Frank law. At its daylong Jan. 25 meeting, FDIC staff made presentations on how they see key aspects of its new authority working. They fielded questions and criticism from advisory members—financial executives, former regulators and academics. Fed staff attended but didn't speak.