Rational Boundaries for SEC Cost-Benefit Analysis

Abstract

A series of D.C. Circuit cases invalidating SEC rules on economic analysis grounds has cast the agency’s rulemaking authority in doubt. We trace the evolution of this case law, noting the incompatibility of strict cost-benefit analysis procedures designed for executive agencies with structure and processes of multimember commissions like the SEC. The SEC has, until very recently, abstained from defining its statutory requirements for economic analysis, and thereby left courts and commenters free to develop an ad hoc, open-ended jurisprudence of economics in SEC rulemaking that has proven increasingly unworkable in practice. Current legislative proposals would codify and extend the logic of this case law, and thereby make future financial regulations even less likely to survive judicial review — even regulations expressly mandated by Congress.

The SEC, faced with these substantial threats to its rulemaking authority should continue to improve its rulewriting processes, including its use of economic analysis, affirm its substantial and long-standing expertise in financial economics, and insist on the agency’s right, derived from that expertise, to discern and define the boundary between economic analysis and policy choice. We view the SEC’s staff’s recent articulation of a theory of economic analysis as an important step in its response to these developments, and recommend continued refinement of its definition of its economic analysis mandates, and their relationship to the SEC’s primary mission, the protection of investors. This effort should lead to economic analyses of future rules that are both meaningful and feasible, and help reclaim the judicial deference that the Commission’s decisions are due, particularly if these staff efforts are adopted at the Commission level.

Keywords: administrative law, cost-benefit analysis, regulation, rulemaking, securities, sec