By a vote of 243-184, the House of Representatives approved the SEC Regulatory Accountability Act (H.R. 78). The Act would require the SEC to conduct cost-benefit analyses of its regulations and orders.
The Act would require the SEC to do the following before issuing a regulation:
- “clearly identify the nature and source of the problem that the proposed regulation is designed to address, as well as assess the significance of that problem, to enable assessment of whether any new regulation is warranted”;
- “utilize the Chief Economist to assess the costs and benefits, both qualitative and quantitative, of the intended regulation and propose or adopt a regulation only on a reasoned determination that the benefits of the intended regulation justify the costs of the regulation”;
- “identify and assess available alternatives to the regulation that were considered, including modification of an existing regulation, together with an explanation of why the regulation meets the regulatory objectives more effectively than the alternatives”; and
- “ensure that any regulation is accessible, consistent, written in plain language, and easy to understand and shall measure, and seek to improve, the actual results of regulatory requirements.”
The Act also requires the SEC to review its regulations every five years and conduct a “post-adoption impact assessment of major rules.”
Lofchie Comment: That regulators should be required to take the costs and benefits of their rulemakings into account seems entirely reasonable. The questions that arise are these: (i) how quantifiable are these costs and benefits in reality, and (ii) how seriously will regulators take the cost-benefit analysis requirement? In his farewell remarks, outgoing Department of Labor Secretary Thomas Perez asserted that the DOL’s new fiduciary rule would save investors seventeen billion dollars a year. (See Outgoing Labor Secretary Highlights “Great Progress.”) That number seems remarkable, especially since it cannot be verified in any scientific manner. Yet despite the ambiguous origins of that number, the DOL uses it to determine that the “benefits” of the rulemaking are high enough to “prove” that they outweigh any possible costs. Similarly, in adopting its rules under Dodd-Frank, the CFTC emphasizes the costs of the financial crisis, as though that crisis would recur if all of the CFTC’s rules were not adopted.
Quantifying benefits is a difficult task. Perhaps one way to solve the problem is to require regulators to justify the predicted effects of their rulemakings. The DOL’s estimate is one example: how would one “prove” the seventeen billion dollar benefit? Clearly, the DOL has assumed that those accounts which are subject to the rule will have higher rates of return. Here is a practical suggestion for making more realistic assessments: take a random group of retail accounts (say, 10,000) and calculate how well they performed over the last three years relative to a market index (such as the S&P 500). Then monitor how well the same accounts perform over the next three years relative to the same index.
Cost-benefit analysis does have its critics. One example is Harvard Law School Professor John C. Coates IV, who examined the implications of case studies concerning the cost-benefit analysis of financial regulation, and recommended steps “towards better cost-benefit analysis.”