SEC Regulatory Accountability Act (H.R. 78) Would Require More SEC Cost-Benefit Analysis

The SEC Regulatory Accountability Act (H.R. 78) passed in the House of Representatives by a recorded vote of 243 to 184 on January 12, 2017. Under current law, the Securities and Exchange Commission (SEC) is required to perform certain cost-benefit analysis (CBA)—a systematic and sometimes quantified examination of potential economic costs and benefits resulting from the implementation of a proposed rule—as part of the rulemaking process. H.R. 78 would impose additional cost-benefit requirements for the SEC, would specify parameters and considerations that must be part of the analysis, and would require the SEC to retrospectively assess the impact of adopted regulation. This Insight describes current requirements and those proposed in H.R. 78 and examines issues related to determining appropriate CBA requirements for the SEC and other financial regulators.

SEC Analysis Required Under Current Law

The National Securities Market Improvement Act (NSMIA; 15 U.S.C §77b(b)) and the Securities Exchange Act (SEA; 15 U.S.C §78w(a)(2)) require the SEC to perform certain analyses. The NSMIA requires the agency, when engaged in rulemaking, to "consider or determine whether an action is necessary or appropriate in the public interest ... [and] whether the action will promote efficiency, competition, and capital formation." The SEA requires an analysis of "the impact any such rule or regulation will have on competition" that includes the reasons that "any burden on competition imposed" is necessary and appropriate.

The Regulatory Flexibility Act (RFA; 5 U.S.C. §§603-604) and the Paperwork Reduction Act (PRA; 44 U.S.C. §§3506) impose analytical requirements that are generally applicable to all regulatory agencies, including the SEC. The RFA is triggered when an agency determines that a rule is likely to have a significant economic effect on a substantial number of small entities. For rules covered by the RFA, agencies must perform an analysis that, among other things, "shall describe the impact of the proposed rule on small entities" and describe the steps the agency has taken to minimize the significant economic impact on small entities. The PRA requires agencies to estimate the burden of information collection and recordkeeping requirements on parties covered by the regulation.

Notably, because the SEC—like most financial regulators—is classified as an independent regulatory agency, it is not subject to certain executive orders (E.O.s)—such as E.O. 12866 and E.O. 13563—that direct the CBAs for most federal regulators. For an examination of CBA requirements across agencies see CRS Report R41974, Cost-Benefit and Other Analysis Requirements in the Rulemaking Process, coordinated by [author name scrubbed].

SEC Analysis Required by H.R. 78

H.R. 78 would impose additional CBA requirements as part of SEC rulemaking that are more detailed and specific than those discussed above, including requirements that the SEC

  • identify the nature and source of the problem and assess its significance;
  • assess the qualitative and quantitative costs and benefits of intended regulation and only propose or adopt regulation on a reasoned determination that the benefits justify the costs;
  • identify and assess costs and benefits of regulatory alternatives—including not regulating—and choose the approach that maximizes net benefits; and
  • consider the impact on investor choice, securities market liquidity, and small business.

The bill would also require the SEC to review its regulations one year after enactment and every five years thereafter to identify unnecessary, ineffective, or excessively burdensome regulations and change or repeal any regulation in accordance with that review.

Finally, the bill would require the SEC to release an assessment plan for each new rule as part of rulemaking that describes how the agency will assess the impact of the rule after implementation and to perform that planned impact assessment within two years of the implementation.

Policy Issue: CBA and Financial Regulators

CBA helps to inform regulators during rulemaking and allows them to base their decisions on an informed estimation of likely consequences. Ideally, all societal costs and benefits of any new rule could be accurately and precisely estimated, quantified, and monetized. The measurements would then be compared to judge whether and to what extent a regulation was beneficial. However, analysis containing this degree of quantitative precision and certainty often is not feasible. CBA requires making assumptions, predicting human behavior, and monetizing outcomes that may not have market prices, among other difficulties.

These challenges raise questions about the appropriate scope, level of detail, and degree of quantification that should be required of CBAs in the rulemaking process. Overly lenient requirements could risk unnecessarily burdensome regulation with limited benefit. Overly onerous analytic requirements could risk impeding the implementation of beneficial regulation, because performing the analysis would be too time-consuming, too costly, or simply not possible.

Appropriately calibrating CBA requirements for financial regulators involves an additional complication: experts disagree over whether financial regulators should be given a relatively high degree of agency discretion in performing CBA.

Some observers assert that financial regulators should not be subject to a rigid legal structure when performing CBA. They claim that attempts to quantify the effects of financial regulation are imprecise and unreliable. These attempts entail making causal assumptions that are contestable and uncertain, and they often face issues concerning data availability and accuracy. Also, financial regulation aims to induce behavioral, microeconomic, and macroeconomic responses, and these effects may be harder to quantify than regulations in other industries that lead to more measurable effects.

Others assert that financial regulators should be subject to stricter CBA requirements than they are now. They argue that requisite, quantitative CBA—when it might yield a wide range of estimates or disagreements over accuracy between technical experts—is necessary because it disciplines agencies in regard to what rules they implement and allows for an objective assessment of whether a regulation is likely to achieve its objective and at what cost. Some claim that the challenges of performing CBA for financial regulations are not greater than for regulations for other industries, arguing that estimations of benefits and costs—while challenging—are possible. Also, some observers have proposed methods of analysis to improve the quality of financial CBA.