SEC Ripped Over Analyses of Rules by Mercatus Study

Before retooling its analysis guidelines in 2012, the SEC “often ignored important alternatives that should be obvious to an expert agency,” say Ellig and Peirce of the Mercatus Center.

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“Significant weaknesses” existed in the Securities and Exchange Commission’s economic analysis of several rules it made prior to the SEC’s 2012 updated guidance on ways the agency could beef up its analysis, a working paper released Monday by the Mercatus Center at George Mason University has found.  

Using the Mercatus Regulatory Report Card methodology, senior research fellows Hester Peirce and Jerry Ellig found that “the quality and use of regulatory analysis at the SEC prior to 2012 was significantly inferior to the quality and use of regulatory analysis by executive branch agencies.”

In their working paper, “SEC Regulatory Analysis: A Long Way to Go and a Short Time to Get There,” Peirce and Ellig cite recent requests by Congress that the SEC conduct a more robust economic analysis when it determines whether new rules are in the public interest, as well as federal appeals courts recently vacating several SEC rules due to “inadequate” economic analysis.

The SEC published staff economic analysis guidance in March 2012 similar to the requirements for impact analyses that executive branch agencies are expected to conduct when making major rules.

SEC economists and the agency’s general counsel jointly issued the 2012 economic analysis guidance after the agency “kept losing in court because of its poor economic analysis,” Peirce told ThinkAdvisor in an email.

“The SEC’s decision to publish new economic analysis guidance was a necessary and appropriate response to the significant flaws” that existed in rulemaking prior to 2012, Ellig and Peirce say.

Peirce and Ellig used the Mercatus Scorecard — a standardized scoring system for executive agency rulemaking that measures openness, analysis and use of economic analysis — to analyze seven rules issued from each SEC division. They intended “to ensure that we captured a broad view of rulemaking issues within the SEC’s regulatory jurisdiction” and to offer “a useful cross section of significant SEC rulemaking.”

The rules the senior Mercatus fellows assessed included the creation of the SEC’s Office of the Whistleblower, the requirement that private fund advisors file form PF with the agency, the switching of advisors under Dodd-Frank from federal to state registration, and the net worth standard for accredited investors.

Peirce and Ellig concluded that the SEC’s rulemakings “read more like justifications of the final rule than careful analyses of the underlying problems and the various ways that those problems could be addressed.”

The analyses failed, they said, “beyond sporadic references, to take advantage of the academic literature that would help them analyze the rulemaking. The analyses often deferred to the statute rather than asking fundamental questions about the need for it and what its objectives would be. In designing many of these rules, the SEC did not appear to have a clear picture of what it was trying to achieve.”

The pre-2012 SEC analyses also “often ignored important alternatives that should be obvious to an expert agency,” as well as “significant costs and asserted significant benefits without providing evidence that the regulation was likely to achieve them,” the paper states.

However, both senior fellows express optimism that the SEC’s economic analysis “will improve” as the agency’s “retooled regulatory analysis takes hold and the SEC applies it more.”

Because the SEC has only promulgated “a handful of major rules” with the full benefit of the 2012 guidance, Peirce and Ellig write, “It is too early to conclude whether the analysis has improved.”

Indeed, SEC Commissioner Daniel Gallagher said recently that the economic analysis the SEC is currently performing on its potential rule to put brokers under a fiduciary mandate will “help the agency to determine whether we need” to move forward.

Peirce and Ellig conclude that while a “more comprehensive economic analysis may be more costly to the agency in the short run,…in the long run [it] may significantly increase the benefits or reduce the costs of the regulations adopted.”

The role of economic analysis in SEC rulemaking could also "reveal best practices from which other agencies could learn or highlight significant pitfalls they should avoid in economic analysis of their own rules," the two senior fellows say. What's more, the SEC’s "interpretation of its statutory rulemaking obligations can provide insights for Congress as it considers various regulatory reform bills designed to foster the use of economic analysis in agency decision making."

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