BRIEF-Shinhan Investment sells 8.1 pct stake in Shinhan 3rd Special Purpose Acquisition
March 28 Shinhan 3rd Special Purpose Acquisition Co Ltd :
(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON Jan 3 Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?
It sounds like a simple question with an obvious answer. But the role of cost-benefit analysis in writing federal regulations (and even laws) is shaping up to be one of the biggest battles between the Obama administration and business groups in 2012.
On one side are business groups such as the U.S. Chamber of Commerce and the International Swaps and Derivatives Association (ISDA), backed by conservative lawyers such as Eugene Scalia (son of Supreme Court Justice Antonin Scalia) and a group of judges on the U.S. Court of Appeals for the District of Columbia Circuit who oversee most federal rule-writing.
On the other is the White House, the Treasury and a host of agencies stretching from the Securities and Exchange Commission (SEC) to the Commodity Futures Trading Commission (CFTC).
QUEST FOR QUANTIFICATION
What was once an esoteric legal dispute is turning fiercely political.
In September, Senator Richard Shelby, the senior Republican on the Banking Committee and a key ally of Wall Street, introduced the Financial Regulatory Responsibility Act (S 1615).
If approved, the bill would prevent federal agencies from introducing any rule until they have completed a "quantitative and qualitative assessment of all anticipated direct and indirect costs and benefits" (Section 3(a)(4)).
Crucially, "an agency may not publish a notice of final rulemaking if the agency .. determines that the quantified costs are greater than the quantified benefits" (Section 3(b)(4)(A)).
Last week, the Wall Street Journal weighed in with an editorial blasting the Obama administration for the poor quality of its regulatory rulemaking.
In language that mirrors the Shelby bill almost exactly, revealing the coordinated lobbying effort, the Journal wrote: "Quality refers to a deliberative process: defining the problem; measuring the costs, benefits and risks; weighing alternatives, making trade-offs, avoiding duplication; and giving the public opportunity to comment" ("Badly Written Bad Rules", Dec 28).
Describing the rulemaking process to implement the Dodd-Frank Act, the Journal observes "Of the 10 rules that were discretionary, the agencies assessed costs and benefits in seven, which might be good enough for government work except that in only two of those cases did the regulators monetize anything."
Shelby's cost-benefit bill has obviously been drafted with input from K-Street lobbyists and conservative lawyers.
It will not progress in the present Congress, where it will be blocked by Senate Democrats and the White House. But the bill reveals much about the approach to regulation ascendant in conservative circles. And the ideas could come much closer to becoming law if the Republican Party makes gains in the 2012 elections.
The conservative and pro-business push back on federal regulations is starting to draw a response. Last month, Treasury Secretary Timothy Geithner hit out at what he called "a determined effort to slow and weaken reforms that are critical to our ability to protect Americans from another crisis".
"The forces working against reform are trying a range of different strategies, including ... efforts to use cost-benefit analysis as roadblocks to reform," Geithner said ("The Macroprudential Toolkit: Measurement and Analysis", Dec 1).
THE BATTLE IN THE COURTS
Efforts to require formal quantitative cost-benefit analysis have already made headway in the U.S. courts, especially in the District of Columbia Circuit Court of Appeals, which is dominated by appointees of the Reagan and Bush administrations, and has been at the heart of the conservative legal revolution.
In July, the court blocked a proposed new SEC regulation on proxy access because the Commission failed to meet its statutory obligations to determine the economic effects of the new rule.
Writing for the court, Judge Douglas Ginsburg noted testily "the Commission acted arbitrarily and capriciously for having failed once again ... adequately to assess the economic effects of a new rule" (Business Roundtable versus SEC, 10-1305, 2011).
"The Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commentors," Ginsburg scalded.
The three-judge panel which ruled against the SEC included Ginsburg and Chief Judge David Sentelle. Lead counsel challenging the rule on cost-benefit grounds was Eugene Scalia.
The arguments and actors were familiar. Two years earlier, Scalia prevailed in a similar case before Sentelle and Ginsburg blocking an SEC rule regulating fixed index annuities under the Securities Act ("American Equity Investment Life Insurance Co versus SEC, 09-1056, 2009).
The court also struck down that rule for violating the Administrative Procedure Act (APA), which requires the courts to set aside any agency action, findings and conclusions found to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" (5 USC 706(2)(A)).
POSITION LIMITS UNDER FIRE
Now Miguel Estrada, Scalia and other business lawyers are going for a triple by launching an unprecedented challenge to the CFTC's new rulemaking on position limits, in a case filed before the district court and the court of appeals for the District of Columbia.
The complaint cites five separate errors by the CFTC in its rulemaking. Much of the public comment has focused on whether the Dodd-Frank Act requires the CFTC to impose limits, or only do so if it finds them necessary (Count 1).
But four other objections centre on violations of Section 706 of the APA (Counts 2-5) specifically whether the CFTC failed to collect sufficient data to quantify the costs and benefits of position limits.
Having never sued anyone previously, ISDA takes aim at the decision-making process: "There really was no cost-benefit analysis. We've seen this before and it is very unsettling, especially when this is also required by law," ISDA complained on its blog ("Why ISDA has resorted to the courts", Dec 6).
"We felt the final rule was not only negative in and of itself; it also made a terrible model for position limits for other products and for developing other rules. We would very much like to see a good faith cost-benefit analysis of other rules as they are finalized. We point to our paper on electronic execution as the type of analysis that should be done".
The complaint against the CFTC is not just about position limits but about the whole way the federal government writes regulations.
QUANTITATIVE OR QUALITATIVE?
The CFTC denies its largely qualitative approach is flawed. It claims to have quantified costs and benefits were feasible, and relied on qualitative assessments where it is not. The CFTC also observed (correctly) the industry's own comments on the rulemaking provided little quantitative data on costs and benefits, perhaps because there is none.
The study ISDA cites with approval, which was about electronic execution, quantified the costs of the rule under consideration quite precisely. But it failed to measure its benefits, dismissing them as "very modest relative to the added costs of execution," which is precisely the objection of selective and imprecise measurement ISDA is making against the CFTC.
In principle, subjecting regulations to cost benefit analysis is an excellent idea. In practice, quantifying costs and benefits objectively is notoriously difficult. The result tends to depend on who is doing the measuring.
But the string of court challenges, and Shelby's bill, are not really about cost benefit analysis at all in the narrow sense. The standard they seek to enforce would be impossible to meet. As Geithner observed, the unstated aim is to beat back federal regulation.
Whether quantitative cost benefit calculations are required by the law is unclear. The Administrative Procedure Act does not explicitly require them, but conservative jurists on the DC Circuit and lawyers like Scalia have stretched the requirements through case law, and may use the CFTC case to try to push them further.
Ultimately, it will fall to the Supreme Court to decide how far Section 706 requires a quantified calculation before new rules are introduced. Even if a Supreme Court showdown is avoided in this case, cost-benefit is scything a path through federal regulations, making a final confrontation inevitable some time soon.
March 28 Shinhan 3rd Special Purpose Acquisition Co Ltd :
* Says it issued 2017 first tranche medium-term notes worth 2 billion yuan