Last week a Subcommittee of the House Financial Services Committee passed H.R. 2308, the "SEC Regulatory Accountability Act," which aims to "improve the consideration by the Securities and Exchange Commission of the costs and benefits of its regulations and orders." Among other things, when deciding how and whether to regulate, the Act requires the SEC to assess the costs and benefits of available regulatory alternatives, and the Act contains eleven factors that the SEC may consider in making such assessment. The Act is a clear response to the DC Circuit's proxy access decision in which the court found the SEC's cost-benefit analysis lacking. Thus, there are those who applaud congressional response on this issue and the corresponding push to strengthen the SEC's economic examination of the rules it enacts. However, there are those who have questioned the wisdom of this Act, including, interestingly enough, a spokesman for the U.S. Chamber of Commerce (one of the groups that challenged the SEC's proxy access law).
In a September hearing before the House Financial Services Committee Chairman Mary Schapiro expressed several concerns with the Act. She noted that the Act appeared to be redundant in light of statutory rules that already require the SEC to consider the economic effects of its rules. From this perspective, while one may quarrel with the SEC's application of its cost-benefit analysis, it is not clear if a new rule directing the SEC to do what it is already supposed to do adds anything to the mix.
Schapiro also noted that some of the factors that the SEC is directed to consider under the new Act appear to be in conflict with one another or the SEC's mission. For example, the Act indicates that the SEC should "assess the best ways of protecting market participants and the public." But Schapiro noted that at times the SEC's mission to protect investors demands that it protects them from certain market participants. If such a conflict arises, one wonders how the Act expects the SEC to address it in a way that it is not merely about checking the box that a concern has been duly raised and noted.
Others have raised equity concerns given that the cost-benefit analysis (and the costs of such analysis) would not apply to similar federal financial regulators. To be sure, such a critique does not appear to be a bid for an extension of such regulation.
In his remarks before the House Committee on Financial Services, Jonathan Katz, representing the US Chamber of Commerce, noted that while he supported the use of a cost-benefit analysis, such analysis has limitations that are "often overlooked." In his view, "Cost-benefit analyses are and will always be fundamentally limited. They require estimates of the impact of events that have not yet happened. Simply put, it is difficult if not impossible for any regulator to know what will happen when a regulation is adopted." Katz went on to say, "If a regulator can't predict the response [to a new rule], it is difficult to accurately quantify the cost of compliance or quantify the value of benefits before one knows how the industry will achieve compliance."
Like others who have raised concerns about the DC Circuit decision, Katz's remarks underscore the problem with measuring the adequacy of a regulation primarily, if not solely, on the purported strength of its related cost-benefits analysis. Namely, such analyses can always be subject to critique because both the costs and benefits are uncertain and unpredictable. Capturing this sentiment, Schapiro concluded her remarks by noting that the Act could produce a rulemaking process that is incapable of implementation and "consistently subject to challenge." From this perspective, one wonders if the Subcommittee should be directed to do a better job of assessing the costs and benefits of its rules prior to implementation.
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