​During the first weekend of the Trump Presidency, the President promised one of the ways he would stimulate growth in the economy was to cut federal regulations by 75%, or “maybe more.” A January 20, 2017 Executive Order required that, for every new regulation it proposed, a federal agency needed to identify at least two existing regulations to be repealed. The Code of Federal Regulations, the repository for existing rules, is approaching 200,000 pages. Through May 2016, the Obama administration alone had added 20,642 regulations, some quite complex.

​The new President may be aiming a bit high. Rolling back an existing regulation can be every bit as difficult and time consuming as promulgating the rule in the first place, as we’ll see in the case of the “fiduciary” rule, a regulation the new administration has specifically targeted.

​The more than 50 regulatory agencies of the federal government have the power to promulgate and enforce administrative regulations, which have the force of law. The rules govern businesses, non-profits and individuals across a broad range of conduct. Just how are these regulations promulgated?

​When Congress passes a law, it typically authorizes a federal agency to develop regulations which are necessary to implement the law. In doing so, the agencies are guided by the Administrative Procedure Act. New regulations or amendments to existing regulations are called “proposed rules.” The APA requires that agencies publish proposed rules in the Federal Register at least 30 days before they are effective and provide a means for the public to offer amendments to, to comment on or to object to the regulatory proposal.

​Congress dictates the manner in which the process goes forward. Some regulations require publication and formal public hearings; others only publication and an opportunity for comment. Proposals that require hearings can take months or even years in the case of controversial or complex matters before they become a “final rule,” the regulation which takes effect and is ultimately printed in the Code of Federal Regulations.

​There are two procedures for expedited rulemaking. For regulations on matters which are deemed to be non-controversial, ”direct final” rulemaking involves agency publication of a rule in the Federal Register with the statement that the rule will be effective on a particular date unless adverse comment is received within a period of time, typically 30 days. If there is adverse comment, the “direct final rule” is withdrawn, and the agency may publish a proposed rule. Agencies can dispense with advance publication if there is “good cause” for doing so. This exception applies in the case of “interim final” rulemaking, in which a rule is effective with post-promulgation opportunity for comment, or where more formal procedures are “impractical, unnecessary or contrary to the public interest.” The “good cause” exemption is a very narrow one.

​Once made, regulations can be overturned by the courts or an act of Congress, or pursuant to the Congressional Review Act (“CRA”), under which Congress can disapprove a rule by joint resolution, subject to presidential veto, within 60 legislative days after submission to Congress for “major” rules and within 30 days for “non-major” rules. Until the second week of the Trump Presidency, Congress had only once before, in 2011, successfully utilized the 20-year-old CRA, to overturn a rule requiring that employers take steps to avoid ergonomic injuries, while President Obama had vetoed five other attempts. In just one week, Congress has now used the CRA five times to roll back a regulation, including an SEC rule requiring energy companies to disclose payments made to foreign governments for developmental rights.

​Unless vulnerable under the CRA, the President will likely find that eliminating federal regulations, especially the ones he deems overly burdensome for business, is a complicated and lengthy process. A proposal to repeal a rule is itself a “proposed rule,” and it triggers rulemaking in reverse. Rolling back a regulation requires publication, comment and perhaps hearings. Take the “fiduciary” rule as an example.

​The rule, issued by the Department of Labor under the authority of the Employment Retirement Income Security Act of 1974, requires that those who provide advice to retirement plans, and plan participants and beneficiaries act in the best interests of clients and provide up front disclosure of fees, and bars conflicts of interest. A similar, more broadly applicable, proposal is before the SEC. The rule would virtually preclude brokers and others from recommending certain pricey investment vehicles. It would also impose what critics have said are onerous compliance and recordkeeping requirements.

​The fiduciary rule was promulgated in April 2016. So it is not subject to congressional disapproval under the CRA. Creating the rule took years and was a contentious, complicated affair. Repealing it may be no easier. The fiduciary rule cannot be undone through an abbreviated procedure. Rolling it back would require a new proposal, notice and a potentially lengthy comment and hearing period. In other words, it might take just as long to unmake the rule as it took to make it in the first place. What is more, it is almost certain that a repealer would not be in place by the time the rule is scheduled to take effect, on April 10, 2017.

​There are also new complications. Some of those who initially opposed the rule–namely, the larger brokers and insurance companies–have already made substantial investments in the technology and compliance expertise necessary to implement it. Believing that independent advisors and broker-dealers lack the resources to do the same, the larger firms may well believe that they have a stake in the survival of the rule to preserve their competitive advantage. In fact, that is precisely what happened in the United Kingdom, which adopted a similar rule in 2011. Since then, the number of U.K. financial advisors has decreased by approximately 22.5%.

​The fiduciary rule is not unique in its complexity and in the consequences, intended and unintended, to which it gives rise. Imagine that complexity multiplied many times over and you can see the magnitude of the task of slimming down the Code of Federal Regulations and the bureaucracy it governs.

​There is, however, a tactic on offer to take the sting out of the fiduciary rule or, for that matter, any regulation. Without funding and a regulator willing to regulate, a rule will have no, or limited, effect. If the new administration decides to withhold funding and declines to enforce the regulation, those who are regulated need not worry about federal government interference. The rule could soon be forgotten.

A draft of a White House memorandum of February 3, 2017 contained an order that implementation of the fiduciary rule be delayed for 180 days pending further review. The order was contrary to the existing rule and of dubious legality. Ultimately, the Presidential Memorandum on Fiduciary Duty Rule of the same date called for reexamination of the regulation, but otherwise left it intact.

​While our purpose is not to recommend policy, we do see merit in a suggestion by Cass Sunstein, who served in the Obama White House, in a November 29, 2016 Bloomberg View column. He called the “two-for-one” idea a “gimmick,” and proposed tweaking the mechanism for eliminating regulations focused on the burdens they impose: the administration could waive two-for-one or impose two-for-one on a government-wide basis, with an emphasis in either case on preventing imposition of a costly rule coupled with elimination of two whose total cost is modest.

​Assessing the costs of a roll back of the fiduciary rule is no easy matter. It requires a balance of the burden on the industry against the cost of repeal, borne exclusively by consumers in the form of higher fees. That’s only one reason an attempted repeal might be controversial, and maybe challenging.


George E.P. Box, the internationally renowned mathematician and statistician, once said, “Essentially, all models are wrong, but some are useful.”1 So where mathematical models replace human thought and judgment, as they are doing on an ever larger scale in today’s financial markets with the advent of electronic trading and digital technologies, it is inevitable that market disruptions will follow on. Automated trading presents a number of challenges, especially for market regulators, who must ensure a level playing field and durable markets, while at the same time take care not to stifle innovation.

While we at Crow & Cushing are only lawyers, not mathematicians or traders, something strikes us as unwise about one aspect of the effort by the United States Commodities Futures Trading Commission (“CFTC”) to regulate automated trading, known as Regulation Automated Trading, or Regulation AT, a proposal almost 500 pages long, first published in December 2015.2 The regulatory history of this provision of Regulation AT bears telling.

The Initial Proposal

Under Rule 1.81 of Regulation AT, as originally proposed by the CFTC, those engaged in algorithmic trading would have been required to maintain their source code in a repository (a structure that stores the code) and make it available to the CFTC and the Department of Justice without a subpoena. Rule 1.81 would also have required that algorithmic traders maintain the source code repository to manage source code, and provide access to copies of all code and any changes to the code. The regulation would have permitted monitoring by the CFTC in real time and required automated alerts when the trading system approached boundaries within which it was designed to operate or upon loss of network connectivity, among other monitoring requirements.

The CFTC viewed the provision as simply a matter of recordkeeping, although it acknowledged the unique characteristics of source code. Perhaps the most articulate and sustained defense of the CFTC proposal came from Better Markets, a not-for-profit dedicated to market reform founded in the wake of the 2008 financial crisis. Better Markets believes that access to source code is a key to detecting and rooting out many types of manipulative and predatory behavior which are otherwise unidentifiable through the use of conventional market data. Source code, Better Markets asserts, needs to be available in real time, not in the aftermath of potentially devastating events.

While not challenging the legality of the CFTC’s original proposal, most critics, and there were many, described source code, accurately we think, as a firm’s intellectual property which contains its confidential current and future trading strategies. Source code reveals not positions held in the past, which can be gleaned from other records already available to regulators, but what a trader intends to buy and sell and the basis for those decisions.

Given today’s level of competition, market participants view source code as the key to their success. They typically employ numerous safeguards to protect against disclosure of their code, including restricting certain classes of their own employees from viewing it. The critics objected strongly to a requirement that they provide unfettered access to regulators in real time and questioned whether the CFTC needed, or was even equipped, to monitor ongoing trading, especially in cases where there is no reason to believe there is an intent to disrupt markets.

A New Proposal Emerges

In the face of widespread industry criticism, and the vehement objections of one of its own Commissioners, the CFTC has now largely scrapped proposed Rule 1.81 and replaced it with Rule 1.84.3 The new proposal would require that covered traders maintain for a period of five years source code they use, material changes to the code and logs recording the activities of their algorithmic trading systems.

In its revised proposal, the CFTC pulled back from the requirement that traders provide real time unfettered access to the code to CFTC staff. In place of those provisions, the CFTC, in Rule 1.84, now proposes that traders covered by the rule make available the documents listed in the rule, including source code, to the CFTC upon a “special call” by the CFTC itself. In other words, the CFTC has added a layer of protection by inserting itself into the process and not leaving the judgment as to whether source code must be produced solely to staff.

Not surprisingly, the new proposal has done little to quell the anxiety of the critics of the original rule. They remain concerned as to how the CFTC will implement its source code review and what will happen to the code once the CFTC completes that review. In their view, the CFTC still fails to offer a valid reason why a subpoena does not provide sufficient access.

A Balance of Interests is Needed

There is to our knowledge no other federal regulation in existence which provides the government with access to the business plan of an enterprise without a subpoena. The SEC, for one, does not require that registrants provide access to their source code.

A balancing of these interests is in order. It seems to us that a less intrusive rule which simply requires that traders preserve all versions of source code and track material changes would not compromise a firm’s intellectual property, but still enhance regulatory oversight. The CFTC would be free at any time, as it is now, to obtain the code through a subpoena based on a showing to a third party that the demand is within its authority and relevant and material to an investigation.

While some of the reactions in opposition to the rule seem at times a bit overwrought–after all, governmental agencies already have ready access to other essential information–those opponents, we think, still have the better of the argument. Furthermore, the fact that the mere proposal of access to source code without a subpoena has proved so unsettling to market participants should itself give the CFTC pause.


1 Box and Draper, Empirical Model-Building and Response Surfaces, 414 (2007).

2 8 Fed. Reg. 78824 (Dec. 17, 2015).

3 81 Fed. Reg. 85393 (Nov. 26, 2016).


Maybe you thought that employers whose employees are not organized in unions or which are not involved in traditional labor activities like strikes, lockouts and picketing are outside of the jurisdiction of the National Labor Relations Board (“NLRB”). If you did, you would be wrong.

Section 7 of the National Labor Relations Act, a depression era law, guarantees that employees have the right to join unions. It also establishes the fundamental right, without reference to unions, of employees “to engage in other concerted activities for the purpose of…mutual aid or protection.”1 Employers who interfere with that right are guilty of an unfair labor practice under Section 8(a)(1) of the Act.2

The NLRB alleged in a Complaint3 that Bridgewater Associates had violated this right by including in its employment agreements certain provisions, which, as we shall see, are a staple of individual employment contracts in the financial services industry. The NLRB’s action arose out of complaints of an employee, an adviser to large institutional investors in Bridgewater, who first contended that his male supervisor had sexually harassed him for about a year by propositioning him and trying to discuss sex during work trips. The employee alleged he was pressured to withdraw his harassment claims, accused of lying and criticized for “blowing he whole thing out of proportion.”

The employee ultimately withdrew his sexual harassment complaint, but instituted a charge with the NLRB, asserting that Bridgewater had suspended him indefinitely for threatening to file the NLRB charge. The allegations of sexual harassment and retaliation were widely reported, but another aspect of the NLRB’s Complaint against Bridgewater seemed to have potentially broader implications.

The NLRB also asserted that Bridgewater had interfered with the rights of its employees under Section 7 of the Act by including in Bridgewater contracts of employment the requirement that employees keep the contractual terms confidential, an overbroad definition of “confidential information,” a restriction on disclosing such confidential information without prior authorization, a prohibition on disparaging Bridgewater and a provision requiring that employees submit any dispute with Bridgewater to binding arbitration.

The NLRB’s allegations against Bridgewater are not completely novel. In fact, the NLRB under the current administration has as a matter of policy taken aggressive stands against restrictions in employment contracts that by now seem unremarkable in many industries, especially the financial services industry. In other words, while the NLRB may be reaching into industries it has traditionally avoided, the claims against Bridgewater are not wildly different from those it has made in the past against others.

In its Complaint, the NLRB was vague about the scope of the remedy it sought. However, there is no reason to believe that the agency is broadly targeting confidentiality provisions, non-disclosure agreements or arbitration clauses.

The courts and the NLRB itself have widely held that an employee’s rights under Section 7 need to be balanced against the employer’s interest in preventing disparagement of its products or services, protecting the reputation of its business and demanding loyalty of employees. Employees are denied the protection of the Act when they are unjustifiably disloyal or engage in defamatory communications or complain of matters not connected with a labor dispute.

So an employer could not utilize a confidentiality policy to bar employees from discussing their salaries, since such discussions would, according to the NLRB, qualify as a protected “concerted” activity. But that same policy could certainly prohibit disclosure of proprietary information, such as an investment strategy, a valuable asset which has no discernible relation to terms of employment. By the same token, an arbitration clause is an appropriate means to resolve most workplace disputes–indeed, the clause in Bridgewater’s agreement may have been the reason that its employee withdrew his sexual harassment complaint. However, arbitration would be inappropriate, at least in the NLRB’s view, as a forum for the adjudication of rights that employees, even non-union employees, assert for their “mutual aid or protection.”

Even in the face of an aggressive NLRB, employers still have the right to require that their employees respect the confidentiality of the vast majority of the information employers seek to protect, to demand employee loyalty and to have workplace controversies resolved through arbitration. Until there is a more employer-friendly NLRB in power, the challenge will be to draft contract clauses and policies that achieve legitimate objectives, but do not substantially impinge on employee associational rights.


1 27 U.S.C. §157.

2 29 U.S.C. §158(a)(1).

3 Bridgewater Associates, LP and Christopher Tarui, Case 01-CA-169426 (June 30, 2016).