Abstract

Recent regulatory debates have centered on whether independent agencies should be subjected to a more rigorous cost-benefit analysis requirement than their current requirements. For example, the Financial Regulatory Responsibility Act of 2011 sought to prevent financial regulators from proposing rules unless the agency engages in a quantitative and qualitative assessment of all relevant costs and benefits. In addition, the Independent Agency Regulatory Analysis Act of 2012 sought to require independent agencies to comply with requirements applicable to executive agencies, which would include the requirement to conduct cost-benefit analysis that conforms to the Office of Management and Budget’s Circular A-4’s guidance. The purpose of this Article is to closely examine the way in which one particular agency -- the Securities and Exchanges Commission (the “SEC”) -- conducts its economic analysis in rulemaking. Currently, the SEC, in rulemaking, largely compares benefits that would accrue to investors against out-of-pocket compliance costs by regulated entities. Circular A-4, by contrast, recommends a total surplus approach, whereby benefits and costs are considered from the perspective of all immediately identifiable parties. The current legislative debates therefore raise an urgent policy question for the SEC: whether the agency, in engaging in rulemaking, should consider the costs and benefits of its rules from the perspective of society as a whole, or instead consider the costs and benefits from the perspective of investor welfare only. It should be noted in particular that regulatory measures of investor protection justifiable under Circular A-4’s cost-benefit analysis basis may not necessarily improve investor welfare, and vice versa. What, then, should be the proper criterion by which to evaluate the efficiency of a securities regulation? By examining a handful of SEC’s major rulemakings, I argue that before there can be any meaningful discussions regarding whether to require the SEC to conduct a more stringent cost-benefit analysis, there must first be a consensus regarding the efficiency criterion of SEC rules. I also suggest certain benefits of having the SEC subscribe to the total surplus approach.

Disciplines

Law | Law and Economics | Securities Law

Date of this Version

3-17-2014