The Evolving Role of Economic Analysis in SEC Rulemaking

Abstract

A series of recent judicial setbacks has rapidly elevated the role of economic analysis and economists at the SEC. I discuss key organizational responses following the 2011 D.C. Circuit decision in Business Roundtable v. SEC. Significantly greater resources were allocated to the SEC’s Division of Economic and Risk Analysis (DERA). Proportional net program costs assigned to DERA grew by over 70% in the subsequent three fiscal years, representing five times larger growth than any other division or office at the Commission. During this period, DERA doubled its staff of Ph.D. financial economists tasked with conducting cost-benefit analyses of rulemaking initiatives. In 2012, DERA also established new guidance on how the SEC would conduct economic analysis. I examine its effect using the risk retention rulemaking from the Dodd-Frank Act, which encompassed the periods before and after the new guidance. This case study reveals that the new guidance resulted in more rigorous and responsive SEC economic analysis. It also illustrates the importance of a well-defined economic baseline, which I contend is often equally as important as quantifying the costs and benefits of a proposed rulemaking action.

Keywords: Cost-benefit analysis, Securities and Exchange Commission, Regulation, Rulemaking, Securities regulation, Dodd-Frank Act

JEL Classification: D02, D61, D78, G18, G38, K22, K23, L51, R28