SEC makes progress on economic analysis of rules: study

WASHINGTON Tue Mar 12, 2013 9:26pm GMT

WASHINGTON (Reuters) - A study commissioned by a frequent critic of the U.S. Securities and Exchange Commission suggests that the agency is making progress in its efforts to analyze the impact its regulations have on companies and the economy.

The study, released on Tuesday, was commissioned by the U.S. Chamber of Commerce and conducted by two law professors at the Ohio State University Moritz College of Law. It calls on other federal financial regulators, such as the Commodity Futures Trading Commission and Consumer Financial Protection Bureau, to take cues from the SEC, which last year released new internal guidance on economic analysis.

The study looked at the quality of cost-benefit analysis in different U.S. financial regulatory agencies, not just at the SEC. But the SEC - in charge of enforcing federal securities laws and regulating the securities industry - is the financial regulator that has been challenged the most over the economic impact of its rules.

The U.S. Chamber of Commerce - a lobbying group representing the interests of many businesses and trade associations - has taken an aggressive stance toward many SEC regulations. It has not been afraid to challenge the SEC's rules in court, if it feels the regulations may impose large costs or burdens on U.S. business interests.

The SEC's new internal guidance on economic analysis called for relying more heavily on economists and providing stronger economic justifications for regulations.

The study, which received some funding and administrative support from the Chamber, was critical of how the SEC has handled cost-benefit analyses over the years. Nevertheless, its two authors said the SEC is starting to shape up.

"The SEC's course of action is one that other financial regulators — such as the CFTC, the CFPB, and the federal banking agencies — can learn from and should follow," professors Paul Rose and Christopher J. Walker wrote.

"Such an approach is required by the law and supported by the history and policies that motivate the use of cost-benefit analysis."

In testimony before a U.S. House appropriations panel on Tuesday, the SEC's new inspector general, Carl Hoecker, said his office is conducting an audit to gauge how well the agency is following through on its internal cost-benefit analysis guidance.

"We have committed to issue that final report at the end of April," he said.

LEGAL CHALLENGES

The SEC's new approach to economic analysis reflects an effort by the agency to bullet-proof its rulemaking, after facing numerous legal challenges.

In July 2011, the SEC had its "proxy access" rule, which empowered shareholders to nominate corporate directors, shot down by a federal appeals court after the Chamber and Business Roundtable alleged the rule failed to spell out the costs and benefits.

The Chamber and other groups including the American Petroleum Institute are slated to face off in court on March 22 over another SEC rule requiring energy companies to disclose the payments they make to the United States and foreign governments.

The SEC faces another challenge in May on its "conflict minerals" rule, which requires companies to disclose if any of their products contain certain minerals from the war-torn Democratic Republic of the Congo.

Like the SEC, the CFTC over the past year has also faced some challenges to its rulemaking. One rule to impose trading curbs was overturned by a lower court, and is now pending appeal.

The CFTC was successful in fending off a second challenge to a rule targeting funds that use commodities, but that case is also still being appealed.

Mary Jo White, President Barack Obama's pick to head the SEC, tackled some of the criticism of the agency's track record on cost-benefit analysis at her confirmation hearing on Tuesday.

She told the Senate Banking Committee that she believes the SEC should assess the economic impacts of its rules "from the outset."

"Such transparent and robust analysis, including consideration of the costs and benefits, will help ensure that effective and optimal solutions are achieved without unnecessary burdens or competitive harm," she said.

Meanwhile, self-regulatory organizations and other entities that must get their rules approved by the SEC, from the Public Company Accounting Oversight Board to the Financial Industry Regulatory Authority, are also paying closer attention now to the economic impact of their rules.

(Editing by Matthew Lewis)