SEC Commissioner Champions High-Quality Economic Analysis as “Essential Part of Regulatory Processes”

SEC Commissioner Michael S. Piwowar remarked that “high-quality economic analysis is an essential part of regulatory processes” for the Public Company Accounting Oversight Board (“PCAOB”). At the PCAOB 2016 Conference on Auditing and Capital Markets, the Commissioner described “common myths and misconceptions about the process.”

Commissioner Piwowar emphasized that high-quality economic analysis: (i) serves as the cornerstone not only for individual rulemakings but for setting the rulemaking agenda as well; and (ii) is necessary not only for the [PCAOB] to satisfy its statutory obligations to find that a proposed rule serves the public interest and protects investors but also as a prerequisite for the Commission to satisfy its own oversight obligations. He stated that the PCAOB’s guidance on rulemaking recognizes “four main elements: (1) the need for the rule, (2) the baseline for measuring the rule impacts, (3) the alternatives considered, and (4) the economic impacts of the rule and alternatives.”

In discussing myths and misconceptions of the regulatory process, Commissioner Piwowar stated that economic analysis:

  • is not interchangeable with cost-benefit analysis – economic analysis is “much broader” and “complements cost-benefit analysis, because it provides a more complete view of the trade-offs and consequences of alternative approaches, thereby providing the tools for ‘thinking through’ the cost-benefit analysis”;
  • does not slow down the rulemaking process, it “actually speeds up the rulemaking process,” by easing compliance burdens;
  • is not a partisan political issue – “[s]olid economic analysis is . . . something that both political parties can agree upon”;
  • is relevant not only to rulemaking but also to other activities such as SEC examinations and investigations; and
  • is not “a fad that will disappear” – it “has become part of the SEC’s DNA . . . [and] will become part of the PCAOB’s DNA, too.”

Commissioner Piwowar commended the PCAOB for “including, as part of its strategic plan, the use of economic analysis tools in conducting post-implementation review of new standards.” He concluded that:

I hope the [PCAOB] is more effective at post-implementation review than the [SEC]. In fact, I hope the Board is so successful in its post-implementation review efforts that the Commission can learn from them.

Lofchie Comment: It is almost certainly not the case that economic analysis is something that both political parties can agree upon. To the extent that either party seeks to use financial regulation as a device for political gain, economic analysis will always run a distant second in importance to polling.