As I’ve blogged about before, the role of cost-benefit analysis—and economic analysis more generally—in financial regulation has been a hot topic in recent years among scholars, policymakers, regulators, and the regulated. This debate has been sparked in part by the D.C. Circuit’s aggressive review of SEC rulemaking—in cases like Business Roundtable v. SEC and others—and also by Dodd-Frank’s demands for financial regulators to create hundreds of new rules and regulations
Back in March 2013, my colleague Paul Rose and I set forth our views in a report commissioned by the U.S. Chamber of Commerce (available here). As the title of the report suggests, we emphasized the importance of cost-benefit analysis in financial regulation as a matter of law and policy. We expressed reserved enthusiasm for the SEC’s response to criticisms about the quality of its economic analysis in rulemaking. As we noted in the report (at 36):
The SEC’s experience with cost-benefit analysis, in court and in practice, provides an important lesson for other financial regulators. In sum, not only does the SEC’s Guidance Memorandum address each of the D.C. Circuit’s specific criticisms in Chamber of Commerce, American Equity Investment, and Business Roundtable, it also addresses the root of many of these problems—the absence of economists in the cost-benefit analysis stage of the rulemaking process.
At the time, however, we did not attempt to evaluate whether the SEC had actually implemented its proposed reforms, much less whether those actions remedied the deficiencies in the SEC’s rulemaking process.
The Georgia Law Review just hosted a symposium on financial regulation, and Joshua T. White has a fascinating contribution, entitled The Evolving Role of Economic Analysis in SEC Rulemaking, which attempts to evaluate the effect of the SEC Guidance Memorandum on SEC rulemaking. Josh is particularly well situated to weigh in on this topic as he was a financial economist at the SEC from 2012-2014. Here’s a nice summary of the paper from the abstract, and you can download the full paper here:
A series of recent judicial setbacks has rapidly elevated the role of economic analysis and economists at the SEC. I discuss key organizational responses following the 2011 D.C. Circuit decision in Business Roundtable v. SEC. Significantly greater resources were allocated to the SEC’s Division of Economic and Risk Analysis (DERA). Net program costs assigned to DERA grew by over 70% in the subsequent three fiscal years, representing five times larger growth than any other division or office at the Commission. During this period, DERA doubled its staff of Ph.D. financial economists tasked with conducting cost-benefit analyses of rulemaking initiatives. In 2012, DERA also established new guidance on how the SEC would conduct economic analysis. I examine its effect using the risk retention rulemaking from the Dodd-Frank Act, which encompassed the periods before and after the new guidance. This case study reveals that the new guidance resulted in more rigorous and responsive SEC economic analysis. It also illustrates the importance of a well-defined economic baseline, which I contend is often equally as important as quantifying the costs and benefits of a proposed rulemaking action.
If you’re interested in this debate or the use of economic analysis in regulation more generally, definitely give this paper a full read. In addition to reviewing the SEC’s response and looking at one particular case study, Josh illustrates the importance of determining the economic baseline when regulating.