SEC looks to economists for legal cover

WASHINGTON Mon Apr 16, 2012 6:23pm EDT

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission is taking extra steps to bulletproof its rulemaking, after U.S. appeals court judges, Republican lawmakers and government watchdogs have criticized how the agency measures the economic impact of its rules.

The SEC has internally circulated a memo guiding staff to rely more heavily on agency economists and to provide stronger economic justifications as they craft rules, according to a copy of the March 16 memo reviewed by Reuters.

SEC Chairman Mary Schapiro is scheduled to appear on Tuesday before a U.S. House Oversight subcommittee for a hearing titled "The SEC's Aversion to Cost-Benefit Analysis."

Questioning the quality of the SEC's economic analysis has been a choice weapon for industry groups and Republicans seeking to challenge or slow agency rules.

In the first successful challenge to a rule linked to the 2010 Dodd-Frank financial oversight law, a federal appeals court last July struck down the SEC's "proxy access" rule that would have made it easier for shareholders to nominate directors to corporate boards.

The SEC's memo calls for integrating the agency's economists into the rulewriting process from beginning to end, clearly spelling out a rule's costs and benefits to the fullest extent possible, and requiring economists to sign off before any final rules are adopted.

The memo says that the SEC may in some instances go above and beyond its legal requirements for justifying the need for a rule mandated by Congress by citing other compelling evidence.

"Economists should be involved at the earliest stages of the rulemaking process... and throughout the course of writing proposed and final rules," the memo says. "Economists should be fully integrated members of the rulewriting team."

The SEC's effort to stave off legal challenges and Republican criticism comes as the agency is writing more than 100 rules required by Dodd-Frank.

Jim Overdahl, a former SEC chief economist who is now a vice president at NERA Economic Consulting, said the March 16 memo shows the SEC is starting to treat rulemaking much more like a legal proceeding.

He added that cost-benefit analysis is important because it holds the agency accountable for the rules it writes.

"You want commissioners when they make decisions to make fully informed decisions about the economic effects of the rules that they are proposing," Overdahl said.

"You don't want the economic analysis to minimize the costs, or be written like a press release to help a rule. It should be something that fully articulates the trade-offs, the costs, the benefits."


Since the SEC's proxy access rule was overturned, the pace of Dodd-Frank rulemaking at the agency has slowed considerably. So far this year, the SEC has not adopted any substantive Dodd-Frank rules.

It has delayed, for instance, finalizing one controversial rule known as "conflict minerals" which will force companies to disclose if their products contain certain minerals from the Democratic Republic of the Congo.

That rule has been a target of the U.S. Chamber of Commerce and others who charge the proposal lacked an adequate analysis and grossly underestimated the costs.

On another controversial rule that will define which companies will face heightened regulations as swap dealers, the SEC recently went out of its way to publicize and seek comments on the economic data that it is using to help write the final rule.

In addition, the SEC's two Republican commissioners have both questioned whether regulators should scrap the current Volcker rule proposal, which limits proprietary trading by banks, due to concerns its market costs may outweigh its benefits.

Tom Quaadman, a vice president at the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said he thinks the SEC's March 16 memo seems like a good "step in the right direction."

But it falls short of doing everything the Chamber wants, such as requiring the SEC to revisit rules two years later to make sure they are having the right impact.

"The reason why Congress and society has decided that cost-benefit analysis is important is because you want to make sure the agencies can put the bad people away, but allow the law-abiding actors to go about their business in an economical way," said Quaadman.

(Reporting By Sarah N. Lynch; Editing by Tim Dobbyn)

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Comments (3)
bocomojoe wrote:
The fact is the SEC did little under the Bush administration after the passage of Sarbanes-Oxley. It’s an agency that’s supposed to have sharp teeth, now the Republicans want to turn it into a toothless old dog. It’s supposed to protect the investing Public, not worry about cost-benefits to corporations. One more reason we need to turn the Republicans out into the cold so we can get the country and economy back on track after 30 years of trickle-down damage.

Apr 16, 2012 9:13pm EDT  --  Report as abuse
wtguy123 wrote:
I voted for Obama because I thought he would bring change..I expected the infra-structure to be number one and bring in much needed JOBS. I expected a more transparent financial-wise government. I expected knowledge when spending billions on banks that would ease homeowners underwater mortgages. I expected a budget before the congress was lost to republicans..Obama had two years!!! I got NOTHING..Obama had tunnel vision toward healthcare. His financial advisors quit because he would not listen or take advice. Our credit rating has fallen. Dodd/Frank has destroyed the income of thousands of forex investors. We are the only nation that its’ citizens can not invest with a foreign broker and bring m,illions of dollars into the USA. In short Obama has failed the country. Can the republicans help? Hell no..Bush started the fall and Obama finished it. I’ve given up and will not vote.

Apr 16, 2012 11:14pm EDT  --  Report as abuse
JoeMilkedACow wrote:
Economists are notorious for their disagreeing schools of thought (see Vogel: Financial Market Bubbles and Crashes; Cambridge Press and notice your own experience). Lets’ get financiers in there with at least equal power with economists.

Apr 18, 2012 2:29am EDT  --  Report as abuse
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