oversight

Regulation and Policy Development Process

Published by the Farm Credit Administration, Office of Inspector General on 2010-08-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

OFFICE OF
                      Report of Audit
INSPECTOR GENERAL
                     Regulation and Policy
                     Development Process

                            A-10-01

                       Veronica McCain
                       Auditor-in-Charge




                         August 30, 2010


                    FARM CREDIT ADMINISTRATION
Farm Credit Administration	                                         Office of Inspector General
                                                                    1501 Farm Credit Drive
                                                                    McLean, Virginia 22102-5090




August 30, 2010


The Honorable Leland A. Strom
Chairman of the Board
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102-5090

Dear Chairman Strom:

The Office of Inspector General (OIG) completed an audit of the Farm Credit Administration’s
regulation and policy development process.

We found the regulation and policy development process is complying with Federal requirements
and is operating effectively and efficiently. This is promoted through:
    •	 ensuring transparency throughout the regulation and policy development process;
    •	 a collaborative process that ensures communication between Board members and staff;
    •	 a team approach and the assignment of staff to regulation and policy projects based on
       matching needs with staff skill levels; and
    •	 the use of various methods to optimize internal and external input on regulation and policy
       decisions.

We conducted the audit in accordance with Government Auditing Standards issued by the
Comptroller General for audits of Federal organizations, program activities, and functions. We
conducted fieldwork from February 2010 through July 2010 and provided a discussion draft report to
management on August 6, 2010. The Office of Regulatory Policy, Office of General Counsel, and
Office of Secondary Market Oversight were given the opportunity to comment on the discussion
draft report. The comments are included in the final report. The report contains no
recommendations or agreed upon actions.

We appreciate the courtesies and professionalism extended to the audit staff. If you have any
questions about this audit, I would be pleased to meet with you at your convenience.

Respectfully,


Carl A. Clinefelter

Carl A. Clinefelter
Inspector General
                              Table of Contents




BACKGROUND _______________________________________________________ 1


OBJECTIVE AND SCOPE ______________________________________________ 2


CONCLUSION ________________________________________________________ 2


AUDIT ANALYSES ____________________________________________________ 2

 Federal Requirements Relating to Regulation Development ______________________2

 Transparency in Regulation and Policy Development ___________________________4

 Coordination Between Board Members and Staff _______________________________6

 Staff Assignments to Regulation and Policy Projects ____________________________7

 External Input on Regulatory Decisions _______________________________________7


APPENDIX
 Agency's Primary Policies and Procedures for Regulation and Policy Development __9
 BACKGROUND

The Agency’s mission includes developing regulations and policies that govern how Farm Credit
System (FCS or System) institutions and the Federal Agricultural Mortgage Corporation (Farmer
Mac) conduct their business. The Farm Credit Administration’s (FCA or Agency) regulation and
policy development initiatives focus on, for example, implementing the Farm Credit Act;
protecting System safety and soundness; providing requirements related to lending, related
services, investments, capital, and mission; and ensuring adequate financial disclosure and
governance.

The Director of the Office of Regulatory Policy (ORP) manages the FCS’s institutions regulation
and policy development program on behalf of the FCA Board. In carrying out the regulation and
policy development function, ORP works with the Office of General Counsel (OGC) and
coordinates with the Regulation and Policy Development Committee (RPDC), Chief Examiner,
and Director of the Office of Congressional and Public Affairs to ensure the regulation and policy
function is:
    •	 a collaborative process that involves early discussion of regulatory and policy issues with
        other office directors, the RPDC, and Board members;
    •	 an efficient process for determining the appropriate regulatory time frames and staff skill
        levels for regulatory and policy projects;
    •	 a process that communicates effectively internally and externally, as appropriate,

        throughout the developmental cycle until full implementation;

    •	 a process that encourages regulatory and policy solutions that are balanced, flexible,
        and supported by appropriate analyses; and
    •	 a process that is conducted consistent will legal requirements.

Every two years internal control reviews are completed by ORP to assess the effectiveness and
efficiency of the regulation and policy development function and determine compliance with
applicable laws and regulations.

The Director of the Office of Secondary Market Oversight (OSMO) manages the regulation and
policy development program regarding Farmer Mac on behalf of the FCA Board. OSMO’s
regulation and policy development process generally functions in the same manner as ORP’s,
except OSMO does not coordinate through the RPDC. However, OSMO does coordinate and
communicate with the FCA Board members’ Executive Assistants during the regulation and
policy development process.

The Agency has developed several policies and procedures to assist with rulemaking
operations. The report’s appendix lists the Agency’s major policies and procedures.




Regulation and Policy Development Process A-10-01                                               1
 OBJECTIVE AND SCOPE

The objective of this audit was to assess whether the regulation and policy development
process is operating efficiently and complies with applicable Federal requirements. The scope of
the audit work included the following:

     •	 interviews with staff from the ORP, OSMO, OGC, and various members of the RPDC;
     •	 review of Federal and Agency guidance that pertains to regulation and policy

        development;

     •	 review of RPDC charter and meeting notes;
     •	 review of the regulation development process;
     •	 review of regulation and policy files and the regulation and policy database; and
     •	 review of regulation and policy team skill levels and size.

The audit was performed at FCA headquarters in McLean, Virginia, from February 2010 through
July 2010, in accordance with generally accepted auditing standards for Federal audits.


 CONCLUSION

The regulation and policy development process is operating effectively and efficiently, and in
accordance with Federal requirements. This is being promoted through:

     •	 ensuring transparency throughout the regulation or policy development process;
     •	 a collaborative process that ensures communication between Board members and staff;
     •	 a team approach and the assignment of staff to regulation and policy projects based on
        matching needs with staff skill levels; and
     •	 the use of various methods to optimize internal and external input on regulation and
        policy decisions.


 AUDIT ANALYSES

Federal Requirements Relating to Regulation Development

The Federal guidance the Agency follows for developing regulations and policies are the
Administrative Procedure Act (APA) and Executive Order 12866 Regulatory Planning and
Review (Order). The APA establishes the process by which Federal agencies propose and
establish regulations. The APA generally requires agencies to provide public notice and seek
comments prior to enacting new regulations. The Order’s objective is to enhance planning and
coordination with respect to both new and existing regulations.




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          Administrative Procedure Act - The APA is the principal law governing rulemaking.

          According to the APA, steps to be followed during the rule making process include:


                •	 publishing proposal rule notices in the Federal Register;
                •	 providing a way for interested parties to participate in the rulemaking process
                   through submission of written data or arguments, with or without oral
                   representation; and
                •	 publishing the final rule in the Federal Register with a concise general statement
                   of its basis and purpose.

          Agency’s Compliance with Administrative Procedure Act - We judgmentally selected the
          following six regulations to assess whether APA guidelines were being followed 1:

                     •	   Capital Adequacy-Preferred Stock (3052-AC21)
                     •	   Farmer Mac Risk-Based Capital Standards (3052-AC17)
                     •	   Farmer Mac Risk-Based Capital Requirements (3052-AC51)
                     •	   Investments in Farmers’ Notes (3052-AC23)
                     •	   Priority of Claims-Subordinated Debt (3052-AC38)
                     •	   Investments in Rural America (3052-AB92)

          For the rules reviewed, we found the Agency was complying with APA. Specifically:

                •	 Proposed rules were published in the Federal Register and included background
                   information, a summary of changes, the effects of changes, objectives, legal
                   authority, and the process for sending comments with the final date for receiving
                   comments.
                •	 The process for receiving comments was outlined in the proposed rules and also
                   stated on the Agency’s website. Comments received were tracked through the
                   regulation and policy database and also on the Agency’s website.
                •	 Final rules were published in the Federal Register. Included in the final rules
                   were a summary of comments received, FCA’s response to comments, and the
                   rule’s effective date. Further, a notice of the rule’s effective date was also
                   published in the Federal Register.
                •	 Rulemaking files were appropriately maintained and included all notices
                   published in the Federal Register as well as other information such as studies
                   relied upon to formulate the rule.
                •	 Prior to rules being published in the Federal Register, quality assurance
                   assessments were completed by the Federal Register Liaison Officer (FRLO). In
                   addition, the FRLO used a timeline checklist to ensure FCA regulations are
                   published in the Federal Register at the appropriate time.


1
  We selected regulations developed during FY 2005-2009. Our selection was based on the following criteria: (1) number of comments received
during the process ; (2) time to develop the regulation from start to finish; (3) mix of regulations to include FCA & OSMO and; (4) type of
regulation, for example, direct final or withdrawn.




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           Executive Order 12866 - The Order was developed to enhance planning and
           coordination for new and existing regulations. According to the guidance, independent
           regulatory agencies are required to prepare a Unified Regulatory Agenda (Agenda). The
           Agenda is to list all regulations under development or review, at a time and in a manner
           specified by the Administrator of the Office of Information and Regulatory Affairs (OIRA).
           The description of each regulatory action shall contain, at a minimum, a regulation
           identifier number, a brief summary of the action intended, legal authority for the action,
           legal deadline for the action, and name and telephone number of knowledgeable agency
           official.

           As part of the Agenda, each agency shall also prepare a regulatory plan of the most
           important significant regulatory actions that the agency reasonably expects to issue in
           proposed or final form that fiscal year or thereafter. Criteria to assess whether a
           regulatory action is significant are outlined in the Order 2.

           Agency’s Compliance with Executive Order 12866 - In accordance with the Order, the
           Agency publishes its Agenda, which includes OSMO, on the OIRA’s website. The
           Agenda contains all the information required by the Administrator of OIRA. In addition, a
           summarized version of the Agenda is published on FCA’s website.

           Each fiscal year the Agency also completes a review to assess whether regulatory
           actions need a regulatory plan. To date, the Agency’s regulatory actions have not been
           significant enough to require a regulatory plan based on the criteria. However, the
           Agency still forwards a letter to the OIRA stating a review was completed and includes a
           list of regulatory actions reviewed.

Transparency in Regulation and Policy Development

Internal and external transparency throughout the development of regulations and policies is
important to affirm the integrity and legitimacy of the regulatory and policy process. In addition,
an openly communicated process will lead to better informed comments as well as a better
understanding of how to comply with regulatory changes. The Agency uses several methods to
ensure the regulation and policy development process is transparent internally and externally.

Internal Transparency - Internal transparency is accomplished through several different
avenues such as monthly status reports, database system, and staff meetings:

     •	 ORP provides monthly status reports summarizing rulemaking activities to the Chief
        Executive Officer, Chief Operating Officer, Board members, and office directors. The
        reports discuss progress made to meet project goals and include dates when major


2
 Significant regulatory actions means any regulatory action that is likely to (1) have an annual effect on the economy of $100 million or more;
(2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary
impact of entitlements, grants, user fees or loan programs or the rights and obligations of recipients thereof; or (4) raise novel legal or policy
issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order.




Regulation and Policy Development Process A-10-01                                                                                                    4
          milestones were met. The reports also serve as a way for Board members and the
          Agency’s senior management to monitor the status of rules and policies.

          OSMO also provides the status of rulemaking activities as part of its monthly office
          report to the Chief Executive Officer, Chief Operating Officer, Board members and office
          directors.

     •	 Regulation Development Team (RDT) project managers and OSMO staff are
        responsible for maintaining a current regulation project profile in the regulation and
        policy database. The regulation and policy database allows staff to share the status of
        regulation and policy efforts. Some of the information maintained in the database
        includes: the project status (pending, complete, or current), project plan, proposed rule,
        final rule, comment letters, Board packages, management reviews and clearance,
        legislative regulatory history, and explanation for any delays. Most ORP, OSMO, OGC,
        and Office of Examination (OE) staff have access to the information in the database.

     •	 The RPDC meets throughout the year to discuss regulatory and policy projects. OSMO
        is not part of the RPDC, however, OSMO meets with Board members’ Executive
        Assistants as needed during the regulation and policy development process. In addition,
        the various offices have regular staff meetings to discuss the status of rulemaking
        projects. Also, at weekly senior staff meetings, ORP and OSMO discuss the status of
        rulemaking projects.

     •	 Per an August 2005 agreement between ORP, OSMO and the Office of Inspector
        General (OIG), ORP and OSMO staff ensures the OIG is apprised of significant
        regulatory and policy projects.

External Transparency - External transparency is mainly accomplished through FCA’s
website which includes the following:

     •	 Regulatory Performance Plan - The Agency posts its Regulatory Performance Plan twice
        a year to coincide with its semiannual update of the Agenda. The plan lists the
        regulatory and policy projects that are active for a 15-month period and describes the
        types of regulation and policy actions planned for each quarter and their purpose.

     •	 FCA Pending Regulations and Notices - The FCA Pending Regulations and Notices
        database provide a list of all pending regulations. Until the comment period expires,
        pending regulations are open to public comment. Also included in this database are
        notices issued by FCA to announce information, public meetings, an action or intended
        action, or to invite comment on issues of public interest.

     •	 Public Comments - For the public comment section of the website one can:
             o	 Read submitted public comments - On the website, the public can read
                 comments received on items that are still open for comment, items on which



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                     the Board has not taken final action, or rules which are not yet effective. This
                     website section also lists the process for reviewing comments on final
                     regulations.
                  o	 Submit comments - Provides instruction on how to submit comments on
                     proposed regulations via the website, e-mail or regular mail.
                  o	 View pending regulations and notices.
                  o	 View Federal Register Documents.

     •	 Also, FCA, including OSMO, provides briefings to Congressional Staff members and the
        Farm Credit Insurance Corporation upon request.

Coordination Between Board Members and Staff

The Agency established the RPDC to foster communication and collaboration with Board
members during the regulation and policy development process. The RPDC facilitates FCA
Board early involvement in the regulation and policy process and provides a forum for
exchanging information that is used to develop regulation and policy positions. Committee
members include the Chief Operating Officer, office directors, and Board members’ Executive
Assistants. Board members’ Executive Assistants brief their Board members about regulation
and policy matters discussed during committee meetings. Agency staff such as policy analysts,
attorneys, and examiners directly involved with the regulations and policies being discussed
also attend committee meetings. Committee meetings are scheduled when needed, by the
Director of the ORP, who serves as the committee coordinator.

Our review of committee meetings’ notes showed meetings are being held throughout the year
for various regulation and policy initiatives. Information discussed at the meetings includes
topics such as:

     •	   Comments received on proposed rules;
     •	   Legal and political aspects of a regulatory or policy initiative;
     •	   Reasons for a regulation or policy;
     •	   Unified Agendas; and
     •	   Status/update on regulation and policy development initiatives.

According to Agency staff, RPDC meetings assist in providing a clear perspective on regulation
and policy development direction. In addition, with Board members early involvement, fewer
changes are needed during the regulation development process.

OSMO primarily achieves this communication and collaboration through coordination with
Executive Assistants and briefings with FCA Board members.




Regulation and Policy Development Process A-10-01                                                       6
Staff Assignments to Regulation and Policy Projects

Regulation and policy development staff are assigned based on project need and staff
expertise. With guidance from the Chief Executive Officer and Chief Operating Officer, the ORP
Director establishes the priority and general timeframes for regulation and policy development
projects. Regulatory projects are accomplished using a team approach. To facilitate staff
assignment, ORP management uses an internal assignment tracking database to determine
staff availability for projects.

          Team Approach - The ORP Director works with ORP senior staff, OGC, and OE
          management to establish a RDT for regulation projects. The RDT usually consists of
          staff from ORP and OGC with participation from OE staff, as needed. The ORP analyst
          serves as the RDT project manager. To advise the RDT, ORP has associate directors
          who are subject matter experts in the areas of Credit and Mission; Finance and Capital
          Markets; Operations, Management and Accounting; and Agriculture and Economics. The
          subject matter experts provide further expertise for significant areas in the regulation and
          policy development process. By putting together staff with varying experience and
          viewpoints, tasks can be divided among team members according to their areas of
          expertise.

          Assignment Tracking Database - ORP management uses an internal assignment
          tracking database to facilitate the timely assignment of staff to rulemaking projects.
          Some of the information captured in the database includes team member names, the
          project initiation date, the statutory due date, the target completion date, and date
          completed. A comment section allows additional information to be recorded on board
          briefing dates and RPDC meetings. The internal assignment tracking database allows
          ORP to determine at any given time, a rule’s status and what staff have been assigned
          to a particular project. This allows ORP to assess staff availability for upcoming projects.

OSMO draws upon its own staff, OGC and OE personnel, and perhaps ORP staff to promulgate
regulations pertaining to Farmer Mac. An outside contractor is also used for technical expertise
in developing changes to the risk-based capital rule that pertains to Farmer Mac.

External Input on Regulatory Decisions

The Agency has used various methods to encourage input on regulatory decisions. These
methods include meeting with interested parties to discuss rulemaking projects, soliciting input
on regulations that may be burdensome; and using an optional rulemaking process to minimize
the potential for unclear rule interpretation.

          Town Hall Meetings - To promote fully informed regulatory decisions, the Agency has
          conducted town hall meetings in coordination with the Farm Credit Council. At the
          meetings, the Farm Credit Council representatives and Agency staff discuss regulation
          and policy issues. Through the discussions, Agency staff and stakeholders explored



Regulation and Policy Development Process A-10-01                                                   7
          external interest, considered options on how rules might be structured, and discussed
          diverse parties’ concerns.

          Regulation Burden Reviews - The Agency periodically conducts a regulation burden
          review. These reviews involve the Agency publishing a Regulatory Burden Solicitation in
          the Federal Register. The solicitation asks for comments from the public on regulations
          that may be duplicative, ineffective in achieving objectives, or impose a burden that is
          greater than the benefit received. After reviewing and analyzing comments received, the
          Agency publishes a summary of the comments and what actions the Agency will take.

          Optional Rulemaking Process - As part of the rulemaking process, the Agency may use
          an Advance Notice of Proposed Rulemaking (ANPRM). The ANPRM is focused on a
          specific subject matter and is used when the Agency feels there is a need to adopt or
          change a regulation. With an ANPR, discussion can be held more openly with outside
          parties on their thoughts and ideas early on in the process.




Regulation and Policy Development Process A-10-01                                                 8
 APPENDIX


 Agency’s Primary Policies and Procedures for Regulation and Policy Development

          •	 FCA Policy Statement 59, Regulatory Philosophy, outlines the Board’s regulatory
             philosophy.
          •	 FCA Policy Statement 37, Communications During Rulemaking, governs the oral
             communication between the public and Board members staff.
          •	 FCA Policy Statement 64, Rules of the Transaction of Business of the Farm Credit
             Administration Board, addresses how the Board operates including how the Board
             manages, administers, and establishes regulations and policies for the FCA.
          •	 Regulation and Policy Development Committee Charter, states the mission,
             authorities, responsibilities, and performance expectation of the committee.
          •	 Agency Administrative Procedures 601, Regulation and Public Policy Development of
             the Farm Credit Administration, discuss the operating procedures, authorities, and
             reporting of policies and regulations.
          •	 ORP Office Directive 2, Regulatory Policy Development, addresses the process for:
                 o	 initiating a regulation and policy project,
                 o	 staffing a regulation development team,
                 o	 reviews during the regulation and development process,
                 o	 proposed, final rule and other policy comments
          • OGC Office Directive 3, Publication of FCA Documents in the Federal Register,
             provides guidance on publication of FCA documents in the Federal Register.




Regulation and Policy Development Process A-10-01                                            9