The SEC’S New Approach to Economic Analysis in Rule Writing

Economic analysis in rule making has become a critical issue for the SEC. The D.C. Circuit has rejected two Commission rules in recent years, expressing concern about the level of analysis. The Office of the Inspector General issued a report earlier this year which considers cost benefit analysis regarding certain Dodd-Frank rules. The GAO issued a report addressing the level of analysis for Dodd-Frank rules late last year. Congress is considering proposals which would require additional economic analysis in rule making.

On April 17 SEC Chairman Mary Schapiro told Congress that the SEC is involving its staff economists earlier in the rule writing process, expects to add 20 economists to the RSFI in the next few months and is requesting funding for 20 more economists. Testimony Concerning Economic Analysis in SEC Rulemaking, before the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs Oversight and Government Reform Committee (here).

After reviewing the statutory predicates for Commission rule making and the difficulties of conducting the appropriate analysis, the Chairman informed the Committee that the agency is implementing new guidance for conducting economic analysis developed by its General Counsel and Chief Economist based on the GAO and OIG reports as well as other sources. Under the new approach to economics in rule writing the agency is:

  • Involving RSFI economists earlier and in a more comprehensive fashion;
  • Assuring the rule releases clearly identify the justification for the proposal;
  • Where a statute directs rulemaking, considering its overall impact;
  • Where feasible, quantifying the costs and benefits and if not explaining that fact;
  • Including a more integrated economic analysis into rule releases;
  • Giving more explicit encouragement to those furnishing comments to provide a more complete economic analysis; and
  • Having a greater discussion of reasonable alternatives not chosen.

A fundamental change made by the Commission is to utilize the expertise of RSFI economists in the rule writing process at the earliest stage and throughout the course of writing proposals. Under the new guidance the Commission is also attempting to clearly identify the justification for the proposed rule, define the baseline against which the economic impact of the rule is measured, discuss reasonable alternatives and analyze the economic consequences of the proposed rule and the principal regulatory alternatives. Finally, as recommended by the OIG report, in some recent releases the Commission is including an integrated economic analysis rather that one which is segmented into sections. Further improvements in the economic analysis will be made in the coming months.

For more cutting edge commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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