Mercatus Scholars and Senior Research Fellows Hester Peirce and Jerry Ellig published a study titled “SEC Regulatory Analysis: ‘A Long Way to Go and a Short Time to Get There,'” which explores the SEC’s use of economic analysis in seven major final rules before, and one major rule after, the issuance of its March 2012 staff economic analysis guidance.
According to the study, Congress requires the SEC to conduct economic analysis to determine whether new rules are in the public interest. The study mentions that Federal appeals courts recently vacated several SEC rules due to inadequate economic analysis. The SEC’s staff economic analysis guidance, published in March 2012, covers similar topics to those of the requirements for regulatory impact analyses (“RIAs”) of major regulations that executive branch agencies are expected to conduct.
The study states that the SEC’s decision to publish economic analysis guidance was a “necessary and appropriate response to the significant flaws” that the study identifies. Using the Mercatus Center’s Regulatory Report Card methodology to assess the quality of proposed regulatory analysis, Peirce and Ellig identify the following weaknesses and deficiencies in SEC analysis:
- the economic analysis accompanying most of these regulations was seriously incomplete and rarely used;
- the SEC regulations examined in this paper scored well below executive branch regulations proposed in 2010-2011, including the executive branch regulations that were most directly relevant to the topics in the SEC’s March 2012 economic analysis guidance;
- the pre-2012 SEC analyses often failed to seriously assess the problems the regulations were supposed to solve;
- the pre-2012 SEC analyses often ignored important alternatives that should have been obvious to an expert agency; and
- the pre-2012 SEC analyses often ignored significant costs and asserted significant benefits without providing evidence that the regulation was likely to achieve them.
The study concludes that an agency which is not committed to careful, well-supported and transparent economic analysis tends to base its rules on speculation and aspirations rather than a concrete understanding of the circumstances in which its rules will have to function. Furthermore, the role of economic analysis could reveal best practices from which other agencies could learn, or highlight significant pitfalls that they should avoid in economic analyses of their own rules.
This is a prepublication draft of an article to be featured in the Spring 2014 issue of the Brooklyn Journal of Corporate, Financial & Commercial Law.