Apr.House OGR Holds Hearing on SEC Cost -Benefit Analysis
At a House Oversight and Government Reform Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs hearing, lawmakers heard from Securities and Exchange Commission (SEC) Chairman Mary Schapiro and a separate panel of industry stakeholders and academics on the SEC’s cost-benefit analysis of proposed rulemakings.
Testimony
In her opening statement, Schapiro stated her belief that the SEC has engaged in more extensive economic analysis of rules than any other financial regulator. Schapiro noted guidance, per her directive, from the Division of Risk, Strategy, and Financial Innovation (RSFI) and the Office of the General Counsel that outlines methods for improving the agency’s economic analysis used in rulemakings. She said the guidance was provided to the Commission for their feedback and that any subsequent suggestions will be incorporated into the final document. The guidance provides for a more comprehensive baseline for which the agency compares the effects of proposed rules by directing staff to consider the overall economic impacts attributable to Congressional mandates and those that result from an exercise of the SEC’s discretion. Under the guidance, proposed rules would: clearly identify the justification for the rules; transparently explain the costs and benefits of rules in cases where quantifying such aspects are not feasible; include more integrated analysis of economic issues; and include greater discussion of reasonable alternatives not chosen.
In his opening statement, David Kotz, former SEC Inspector General (IG), provided an overview of work conducted by the IG’s office during his tenure, and cited the January 2012 review that showed the SEC may not have been providing a “full picture of whether the benefits of a regulatory action are likely to justify its costs and which regulatory alternatives would be the most cost-effective.” Kotz noted the report’s recommendations which included: considering ways for economists to provide additional input into the cost-benefit analysis of SEC rulemakings; using a consistent baseline in the cost-benefit analyses with such baseline being specified at the beginning of the cost-benefit analysis section; and including internal costs in the analyses of rulemakings.
In her opening statement, Jacqueline McCabe, Executive Director for Research for the Committee on Capital Markets Regulation, expressed the Committee’s concern over the “inadequate cost-benefit analysis in the vast majority of rulemakings under Dodd-Frank…” McCabe cited the Committee’s study on 192 proposed and final rules under the Dodd-Frank Act which found that 57 rules contain no cost-benefit analysis, 85 of the rules contain entirely non-quantitative cost-benefit analysis, and 50 of the rules that contain quantitative analysis are largely limited to the costs of paperwork, compliance requirements, and technology enhancements. McCabe noted that when regulators deem rules too insignificant to warrant any cost-benefit analysis they should clearly explain how those conclusions are reached.
Question and Answer
Subcommittee Chairman Patrick McHenry (R-N.C.) asked Schapiro if current regulations require the SEC chief economist to review all rules before they are promulgated and whether the chief economist has veto power over any such rules. Schapiro said the current rules require the chief economist to review rules at all stages of implementation. She said a concurrence requirement exists with respect to the chief economist’s review of the rules and that any dissent would very likely warrant additional review by the Commissioners.
Rep. Mike Quigley (D-Ill.) asked Schapiro if the SEC seeks industry input regarding the costs of regulating products. Schapiro said the SEC talks to the industry about many factors related to the costs of new rules, including staffing and competitive effects as well as affirmatively asking for data to prove or disprove the agency’s assumptions of the rules.
Quigley asked how the SEC determines the riskiness of products. Schapiro said SEC staff with the proper expertise help to make such determinations. She noted that the industry is better situated to provide data to inform the rulemaking process in a “specific, operational way.”
Quigley also questioned whether the SEC always uses cost-benefit analysis in new rulemakings. Schapiro said the SEC always uses analysis required by the Paper Reduction Act, the Small Business Regulatory Enforcement Act, and the Regulatory Flexibility Act as noted in her testimony.
Rep. Carolyn Maloney (D-N.Y.) told Schapiro that the SEC must prioritize its rulemaking process related to the Dodd-Frank Act to ensure rules that directly address causes of the crisis, including the risk retention rules, are implemented expeditiously.
McHenry asked what process the SEC is undertaking to implement the crowdfunding provision (which he sponsored) under the newly-enacted Jumpstart Our Business Startups (JOBS) Act, noting Schapiro’s previous concerns with the legislation. Schapiro said certain provisions in the bill took immediate effect, such as the initial public offering on-ramp requirements, and that the SEC is working to implement the law as closely as possible to what Congress intended regardless of whether they agree with it or not.
During questioning of the second panel, McHenry largely focused on issues related to the JOBS Act and asked the witnesses for recommendations to update the securities laws that would have beneficial impacts on the economy. Kotz said the best action to take now is to ensure new regulations are necessary and actually benefit the economy. Henry Manne, Dean Emeritus at the George Mason University School of Law, suggested the judicial review of regulatory rules be enhanced.
McHenry also asked the panelists if the SEC failing to require the Financial Industry Regulatory Authority (FINRA) and the Public Company Accounting Oversight Board (PCAOB) to uphold the cost-benefit standards in its new guidance would amount to regulatory failure. All of the panelists agreed that not requiring the self-regulatory organizations to uphold the same standards would create a significant problem.
For testimony and webcast of the hearing, please click here.
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At a House Oversight and Government Reform Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs hearing, lawmakers heard from Securities and Exchange Commission (SEC) Chairman Mary Schapiro and a separate panel of industry stakeholders and academics on the SEC’s cost-benefit analysis of proposed rulemakings.
Testimony
In her opening statement, Schapiro stated her belief that the SEC has engaged in more extensive economic analysis of rules than any other financial regulator. Schapiro noted guidance, per her directive, from the Division of Risk, Strategy, and Financial Innovation (RSFI) and the Office of the General Counsel that outlines methods for improving the agency’s economic analysis used in rulemakings. She said the guidance was provided to the Commission for their feedback and that any subsequent suggestions will be incorporated into the final document. The guidance provides for a more comprehensive baseline for which the agency compares the effects of proposed rules by directing staff to consider the overall economic impacts attributable to Congressional mandates and those that result from an exercise of the SEC’s discretion. Under the guidance, proposed rules would: clearly identify the justification for the rules; transparently explain the costs and benefits of rules in cases where quantifying such aspects are not feasible; include more integrated analysis of economic issues; and include greater discussion of reasonable alternatives not chosen.
In his opening statement, David Kotz, former SEC Inspector General (IG), provided an overview of work conducted by the IG’s office during his tenure, and cited the January 2012 review that showed the SEC may not have been providing a “full picture of whether the benefits of a regulatory action are likely to justify its costs and which regulatory alternatives would be the most cost-effective.” Kotz noted the report’s recommendations which included: considering ways for economists to provide additional input into the cost-benefit analysis of SEC rulemakings; using a consistent baseline in the cost-benefit analyses with such baseline being specified at the beginning of the cost-benefit analysis section; and including internal costs in the analyses of rulemakings.
In her opening statement, Jacqueline McCabe, Executive Director for Research for the Committee on Capital Markets Regulation, expressed the Committee’s concern over the “inadequate cost-benefit analysis in the vast majority of rulemakings under Dodd-Frank…” McCabe cited the Committee’s study on 192 proposed and final rules under the Dodd-Frank Act which found that 57 rules contain no cost-benefit analysis, 85 of the rules contain entirely non-quantitative cost-benefit analysis, and 50 of the rules that contain quantitative analysis are largely limited to the costs of paperwork, compliance requirements, and technology enhancements. McCabe noted that when regulators deem rules too insignificant to warrant any cost-benefit analysis they should clearly explain how those conclusions are reached.
Question and Answer
Subcommittee Chairman Patrick McHenry (R-N.C.) asked Schapiro if current regulations require the SEC chief economist to review all rules before they are promulgated and whether the chief economist has veto power over any such rules. Schapiro said the current rules require the chief economist to review rules at all stages of implementation. She said a concurrence requirement exists with respect to the chief economist’s review of the rules and that any dissent would very likely warrant additional review by the Commissioners.
Rep. Mike Quigley (D-Ill.) asked Schapiro if the SEC seeks industry input regarding the costs of regulating products. Schapiro said the SEC talks to the industry about many factors related to the costs of new rules, including staffing and competitive effects as well as affirmatively asking for data to prove or disprove the agency’s assumptions of the rules.
Quigley asked how the SEC determines the riskiness of products. Schapiro said SEC staff with the proper expertise help to make such determinations. She noted that the industry is better situated to provide data to inform the rulemaking process in a “specific, operational way.”
Quigley also questioned whether the SEC always uses cost-benefit analysis in new rulemakings. Schapiro said the SEC always uses analysis required by the Paper Reduction Act, the Small Business Regulatory Enforcement Act, and the Regulatory Flexibility Act as noted in her testimony.
Rep. Carolyn Maloney (D-N.Y.) told Schapiro that the SEC must prioritize its rulemaking process related to the Dodd-Frank Act to ensure rules that directly address causes of the crisis, including the risk retention rules, are implemented expeditiously.
McHenry asked what process the SEC is undertaking to implement the crowdfunding provision (which he sponsored) under the newly-enacted Jumpstart Our Business Startups (JOBS) Act, noting Schapiro’s previous concerns with the legislation. Schapiro said certain provisions in the bill took immediate effect, such as the initial public offering on-ramp requirements, and that the SEC is working to implement the law as closely as possible to what Congress intended regardless of whether they agree with it or not.
During questioning of the second panel, McHenry largely focused on issues related to the JOBS Act and asked the witnesses for recommendations to update the securities laws that would have beneficial impacts on the economy. Kotz said the best action to take now is to ensure new regulations are necessary and actually benefit the economy. Henry Manne, Dean Emeritus at the George Mason University School of Law, suggested the judicial review of regulatory rules be enhanced.
McHenry also asked the panelists if the SEC failing to require the Financial Industry Regulatory Authority (FINRA) and the Public Company Accounting Oversight Board (PCAOB) to uphold the cost-benefit standards in its new guidance would amount to regulatory failure. All of the panelists agreed that not requiring the self-regulatory organizations to uphold the same standards would create a significant problem.
For testimony and webcast of the hearing, please click here.