Monthly Archives: April 2014

Mercatus Scholars Issue Study Regarding Shortcomings in SEC Use of Economic Analysis

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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.

Click here to view the working paper, “SEC Regulatory Analysis:  ‘A Long Way to Go and a Short Time to Get There,'” by Hester Peirce and Jerry Ellig. To view the Research Summary, click here. 

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.

 

Congressional Representatives and Tech Entrepreneurs Talk Data

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A Congressional Transparency Caucus panel of House Representatives and tech entrepreneurs met to discuss the impact of variety of issues related to data, including the recently passed H.R. 4164, according to the Data Transparency Coalition (“DTC”). 

The DTC stated that the U.S. Senate is poised to act on its version of the Digital Accountability and Transparency Act (“DATA Act”), which was shepherded through the House of Representatives last November (388-1) by Rep. Darrell Issa (R-CA).  The DATA Act would mandate the implementation of government-wide data standards for public information on federal spending.

Additionally, panel members discussed the “potentially devastating impact of H.R. 4164,” or the “Small Business Disclosure Simplification Act,” which was approved this month and exempts over 60% of U.S. public companies from the obligation to file their financial statements with the SEC in the eXtensible Business Reporting Language (“XBRL”) structured data format.

According to members of the panel, businesses would be “severely impacted” if H.R. 4164 were adopted, since “open data must be easily consumable, complete, and of high quality” in order for it to be useful for businesses, and H.R. 4164 would render the SEC’s current corporate financial data set “so incomplete as to make it functionally useless.”

The panel called for Congress to reject H.R. 4164 and direct the SEC to validate and enforce the quality of structured data corporate financial statement filings.  Additionally, panelists advocated for the expansion of structured data tagging to other submissions that are expressed today as plain-text documents, such as earning releases on Form 8-K.

See:  DTC Blog: Reps. Issa and Quigley Talk Open Data and Jobs at Transparency Caucus Panel.
See also:  H.R. 4164; DTC Blog: House Financial Services Committee Moves to Exempt Most Companies from Open Data Reporting (March 14, 2014); DTC Information on the DATA Act. 

 

OTC Derivatives Regulators Issue Report to the G20

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The OTC Derivatives Regulators Group (“ODRG”) released a report that identifies the current list of remaining cross-border implementation issues related to the global reform of OTC derivatives markets.  The report includes a summary of the status of such issues, as well as a timetable for addressing them through a series of reports to the G20 Finance Ministers and Central Bank Governors over the course of 2014.

The main focus of this initial report to the G20 was to address cross-border issues on which the ODRG is working in relation to developing approaches to the treatment of branches and affiliates, and the implementation of the trading commitment through organized trading platforms. The report further addresses the following:

  • how ODRG members are working to implement understandings reached in four key areas:
    • equivalence and substituted compliance,
    • clearing determinations,
    • margin requirements for non-centrally cleared derivatives transactions and
    • access to trade repository data;
  • how the ODRG is monitoring cross-border issues with respect to:
    • risk mitigation techniques for noncentrally cleared OTC derivatives transactions,
    • access to registrants’ books and records and
    • barriers to reporting to trade repositories; and
  • bilateral progress to address timing differences in the implementation of trading frameworks, and to develop mechanisms to enhance cooperation and information sharing.

The ODRG is made up of authorities with responsibility for the regulation of OTC derivatives markets in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States.

See:  ODRG Report.

 

FIA Issues Statement Regarding High-Frequency Trading Book by Michael Lewis

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The Futures Industry Association (“FIA”) Principal Traders Group issued a statement in anticipation of the release of Flash Boys, a book by Michael Lewis that describes some of the recent developments in electronic trading and market structure in the U.S. equity markets.  FIA stated that it hopes “the book will draw attention to the dramatic changes in trading technology that have occurred in U.S. equity markets as well many other markets worldwide.” 

According to FIA, the use of high-frequency trading tools has contributed to substantial improvements in market quality that have benefited investors; however, the rapid pace of change in the equity markets due to high-frequency trading has also caused confusion and suspicion among investors, and FIA supports efforts to improve the understanding of modern markets.

FIA explained that the book discusses a newly formed trading venue called IEX Group, and stated that FIA welcomes such experimentation in market design, though “any trading venue will have difficulty meeting the needs of investors without the liquidity and price discovery provided by professional traders.”  Going forward, FIA urged regulators to conduct a thorough examination of all aspects of market structure based on empirical data and analysis, and applauded the SEC’s MIDAS initiative.

See:  FIA Statement.