In Business Roundtable v. SEC, the DC Court of Appeals struck down the proxy access rule giving certain shareholders access to the corporate proxy on the grounds that the SEC failed to adequately fulfill its requirement to consider the impact of new rules on “efficiency, competition, and capital formation.” The Court offered a blistering critique of the SEC’s economic analysis in the rule. Criticism of the opinion followed and also led to a series of Congressional hearings on the SEC’s process for weighing the economic costs and benefits of new rules. Many of the critics of the opinion, and indeed of cost-benefit analysis itself, have argued that it is simply too difficult to guide rulemaking, or that costs are easier to measure than benefits and so the approach trends against the status quo.

I counter that critique of Business Roundtable by way of example in an article co-authored with Thomas Stratmann in the Stanford University Law Review, Does Shareholder Proxy Access Damage Share Value in Small Publicly Traded Companies? We suggest a question the SEC might itself have investigated about its approach, if it had submitted a rule proposal first and if it was committed to economic analysis of its rules. We consider a natural experiment provided by the rule’s differential impact on small and large firms above and below the arbitrary $75 million market capitalization separation. We measure the impact of the market’s frustrated expectation of a permanent exemption for small firms, an expectation stemming from prior SEC implementation of other controversial rules and strong language in the Dodd-Frank Act, against a control group represented by large firms who expected application of the rule and for whom the new rule’s impact was largely capitalized into their value.

…continue reading: Shareholder Proxy Access in Small Publicly Traded Companies

In the past few years, several important financial regulations have been struck down by the D.C. Circuit Court of Appeals because the regulatory agency failed to prove that the benefits of those regulations exceeded the costs. There is no current explicit legal requirement for financial agencies to conduct cost-benefit analyses, but given vagaries in the underlying statutes, the Court has felt that it has the authority to insist on a greater degree of economic rigor than agencies often display. In a parallel development, Senator Shelby has introduced a bill that would explicitly require financial agencies to perform cost-benefit analyses. If the bill is enacted, we will see even greater bloodshed in the courts.

…continue reading: Benefit-Cost Analysis for Financial Regulation

In a recent paper co-authored with Connor Raso, I argued that D.C. Circuit’s Business Roundtable decision has set a very high bar for cost-benefit analysis in rulemaking by financial regulators like the SEC. In 2011, the court struck down the agency’s long-pondered proxy access rule—a rule expressly authorized by Dodd-Frank—and did so in a way that calls into question the practical ability of the SEC and other financial regulatory agencies with similar mandates to adopt future rules that will withstand timely challenge.

Our paper, Rational Boundaries for Cost-Benefit Analysis in SEC Rulemaking (forthcoming, Yale Journal on Regulation), analyzes the interplay of legislative, executive, agency and judicial actions over the last thirty years that led to this situation. We point out the contradiction between the Commission’s structure (bipartisan by statute and often requiring logrolling compromises to reach a result) and the assumption of global rationality that underlies cost-benefit analysis.

…continue reading: Rational Boundaries for Cost-Benefit Analysis in SEC Rulemaking

As you may know, the SEC has recently enhanced its economic firepower, through, for example, significantly increasing the number of PhD economists in the Division of Risk, Strategy, and Financial Innovation. Lately much of the external focus on the role of economic analysis at the SEC has been on cost-benefit analysis – which is certainly an important part of economic analysis. However, it is not the only way that the Commission is using economic analysis in our work. Increasingly, our economists are getting involved earlier and more comprehensively in the rulemaking process, not just to help the Commission weigh the ultimate costs and benefits of our regulatory decisions, but to provide a reasoned framework for making those decisions. Examples include providing up-to-date information about the current state of the markets, and helping us think of alternative ways to meet our regulatory goals.

I believe that these efforts are bearing fruit, and I would like to provide a recent example of a significant regulatory action where, in my view, we used economic analysis effectively to guide our decision-making. This was in our adoption of the rule defining “security-based swap dealer” under Title VII of the Dodd-Frank Act, as part of a joint rulemaking with the CFTC. Further defining the term “security-based swap dealer” was one of the many tasks that Congress assigned to us as part of creating a new regulatory regime for security-based swaps. Congress also mandated that the Commission exempt from the dealer designation an entity that engages in a de minimis quantity of dealing activity. Again, however, Congress left it to us to hammer out the details of what would constitute a de minimis level of dealing activity. Considering that the over the counter derivatives market is still a largely unregulated space, determining an appropriate de minimis level seemed like a daunting task, and the comments we received reflected a diversity of views on what this de minimis level should be.

…continue reading: Using Economic Analysis in SEC Rulemaking