In the wake of criticism that the Securities and Exchange Commission has not done enough to assess its rules’ economic impact, its Office of the General Counsel and Risk, Strategy, and Financial Innovation Division is providing staff with guidance that it needs to conduct a more thorough economic analysis during the entire rule writing process. One of the requirements is that there must be a cost-benefit evaluation when rules that are congressionally mandated or discretionary are involved. This guidance is now binding.
However, SEC Chairman Mary Schapiro was quick to point out to the House Oversight Subcommittee on TARP and Financial Services that many of the rules that are written already follow this guidance. Now, staff will assess the cost-benefits of 28 rules that the Commission is proposing in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The guidance comes following a report that was issued in January. In it, the Office of the Inspector General blamed the SEC for not conducting cost-benefit analysis when writing Dodd-Frank mandated rules. In addition to providing more comprehensive cost-benefit analysis, the SEC must also note the justification for the proposed rule, identify reasonable options to the rule, evaluate any economic repercussions, and find a baseline point for beginning the analysis. The SEC will be hiring more than three dozen economists to join its staff. If the Commission ends up being able to properly implement this guidance, then Congress may have to legislate.
Commenting on this recent development, Shepherd Smith Edwards and Kantas, LTD, LLP Partner and Institutional Investment Fraud Lawyer William Shepherd said, “How high should the cost of regulations be on a mega-billion dollar industry with record profits in a recession after just ripping off investors worldwide for trillions of dollars because of lack of regulations? Wall Street is an industry of whiners who thinks they are the victims because the cops say slow down in a construction zone or school district.”
Rep. Scott Garrett (R-NJ), who authored HR 2308, the SEC Regulatory Accountability Act that similarly seeks to enhance the Commission’s cost-benefit analysis in similar fashion as the guidance, still plans to keep pushing for his bill’s passage. HR 2308 made it through the House Financial Services Committee a couple of months ago.
Garrett would prefer for the cost-benefit mandate to become statute so that the requirements that the SEC must meet are clear, which should hopefully ensure that any rules the Commission does end up writing doesn’t slow economic growth. Garrett’s spokesperson sent BNA an email stressing that another reason it was important for the order to become law rather than mandated SEC guidance is that that future SEC chairmen might choose not to adhere to it.
New SEC Guidance Directs Staff to Enhance Cost-Benefit Analysis in Rulewriting Process, Bloomberg/BNA, April 18, 2012
Garrett Urges SEC Chairman to Support Cost-Benefit Analysis, US Congressman Scott Garrett, Congressman Garrett, April 25, 2012
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FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011
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