On Tuesday, April 17, 2012, Mary Schapiro, the Chairman of the SEC, appeared before the House Subcommittee on TARP, Financial Services and Bailouts to testify about the steps the SEC has taken and is taking to strengthen our economic analyses in the rulemaking process. Chairman Schapiro acknowledged that "economic analysis is a critical element of the SEC’s rulemaking obligation," and that "the unprecedented rulemaking burden generated by passage of the Dodd-Frank Act has tested the resources and analytical capabilities of the agency." However, she explained, the Commission has "learned a great deal and our rulemaking processes have continued to evolve." She told the Subcommittee that the SEC’s "new guidance reflects many of the current best practices, which the agency will refine in the future as necessary to ensure high quality economic analysis in its rulemaking."
Chairman Schapiro explained how the SEC’s "rulemaking process is governed by a number of legal requirements, including those under the federal securities laws, the Administrative Procedure Act (‘APA’), the Paperwork Reduction Act of 1980 (‘PRA’), the Small Business Regulatory Enforcement Fairness Act of 1996, and the Regulatory Flexibility Act." She also explained how the Commission must determine whether a rule is in the public interest, whether it would protect investors, and whether it will promote efficiency, competition, and capital formation. The SEC must also consider the impact any rule would have on competition. She explained that while the Commission is not required to conduct a formal cost-benefit analysis, it has done so as a matter of good practice.
According to Chairman Schapiro, GAO and the SEC’s Office of Inspector General have reviewed the SEC’s cost-benefit analysis in rulemaking and found that the Commission engages in a "systematic approach" to cost-benefit analysis in rulemaking. GAO also provided "useful direction for improvement." She also cited issues raised by Congress about certain aspects, as well as recent court decisions. An example of the latter was the decision in the Business Roundtable case, when the D.C. Circuit vacated Exchange Act Rule 14a-11, finding that "the Commission acted arbitrarily and capriciously for having failed once again … adequately to assess the economic effects of a new rule," as discussed here. Shortly after that decision, the SEC announced that it would not appeal the matter, pledging to "learn from the Court’s objections," as described here.
Chairman Schapiro explained that the Commission and its staff have learned valuable lessons in implementing the rules required under the Dodd-Frank Act thus far. Those lessons have included:
• involving the Division of Risk, Strategy, and Financial Innovation ("RSFI") earlier in the rulemaking process, so that the RSFI economists can provide economic analysis of different policy options before a proposed course is chosen and throughout the course of the development of the rule;
• assuring that rule releases clearly identify the justification for the proposed rule, such as a market failure or a statutory mandate;
• considering the overall economic impacts of the rule, including those attributable to Congressional mandates and those resulting from the Commission’s exercise of discretion;
• quantifying the costs and benefits when possible; and
• conducting a more integrated analysis of economic issues (including efficiency, competition, and capital formation) in the Commission’s rule releases.
She also described how economists "must play a central role in rulemaking," and pledged "close collaboration" with RSFI to integrate economic analysis during the process. She explained Commission efforts to provide additional resources to RSFI by, among other things, adding at least 20 more economists in the coming months.
She explained how the SEC’s efforts "should result in the public, Commission, and staff being better informed about rules’ likely economic consequences and in more clear and comprehensive economic analyses," and pledged "further improvements … in the weeks and months ahead."