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SEC Promises Better Rulemaking Efforts

Compliance Week | April 17, 2012

The chairman of the Securities and Exchange Commission told Congress that her agency will redouble its efforts to perform cost-benefit analyses of the various rules the SEC adopts, although she also defended the agency from any criticism that it has done a poor job of such analysis in the past.

Speaking at a hearing of the House Government Oversight Committee (which the committee had tartly titled, “SEC's Aversion to Cost-Benefit Analysis”), SEC Chairman Mary Schapiro admitted that her office has heard an earful of criticism lately, including a stinging federal appeals court decision in 2011 that invalidated a rule for shareholder access to the proxy statement that specific cited poor cost-benefit analysis as part of its reasoning.

To remedy the situation, Schapiro said, the SEC's general counsel and chief economist have crafted new internal guidance on conducting economic analysis of proposed rules. Foremost, that new approach will include involving the SEC's Division of Risk, Strategy, and Financial Innovation much earlier in the rulemaking process. The SEC will also strive to identify the purpose and need for its rules as clearly as possible, and offer specific estimates for compliance costs whenever possible.

“Economists must play a central role in rulemaking, whether in identifying concerns or issues that may justify regulatory action or analyzing the likely economic consequences of competing approaches,” Schapiro said in written testimony to the House Oversight Committee. “The staff's current guidance emphasizes that significant role.”

To that end, Schapiro said, the SEC plans to hire 20 more economists in its RSFI Division in coming months, and wants to hire another 20 more in 2013.

The SEC has a long history of being in the political cross-hairs for cost-benefit analysis. Most infamous was its estimate in the early 2000s that compliance with Section 404 of Sarbanes-Oxley would cost less than $100,000 per company; the actual number for most large corporations runs into the millions every year. Conversely, in the depths of the financial crisis in 2008 and 2009, critics on the left complained that loose regulation under the Bush Administration led to millions of lost jobs and lost market value. 

Others appearing before the House Oversight Committee piled on the criticism. Jacqueline McCabe, head of research for the pro-business Committee on Capital Markets Regulation, said her group reviewed 192 rules adopted by various federal agencies in response to the Dodd-Frank Act. Of those 192 rules, 85 had cost-benefit analyses that were purely qualitative (“we expect costs to be minimal,” for example), and 57 had no cost-benefit analysis at all, she said.

The SEC issued 54 Dodd-Frank related rules through mid-November, McCabe said; of that number, 26 included cost-benefit analyses that were purely qualitative, and four had no analysis at all.

Still, McCabe did give the SEC credit for doing a good job. “We found that relative to other agencies including the Commodities and Futures Trading Commission, the SEC's analysis was generally more thorough and included more quantitative analysis. Furthermore, in its more recent rulemakings, we have found the SEC has enhanced its cost-benefit analysis,” she said.