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Securities Compliance Sentinel Analysis of cutting-edge securities industry issues

The SEC Is To Employ Cost-Benefit Analysis For Its Rule-Making

Posted in Dodd-Frank, SEC Compliance, SEC Enforcement, SEC Organization, SEC Structure, Securities Legislation

According to an internal SEC guidance report, the SEC is taking to heart the criticism that it does not employ enough of an economic analysis in its rule-making process.  The guidance directed the SEC to take a cost-benefit approach to all rule-making, regardless if the rules are discretionary or mandated by Congress.

This guidance report is in direct response to an earlier report that sharply criticized the SEC for not conducting the cost-benefit analysis for rules mandated by Dodd-Frank.  As part of its response, Chairman Schapiro has noted that the SEC has hired 20 economists and is asking Congress form the funding to hire an additional 20 economists.

Although the SEC should be praised for taking criticism to heart, it also reflects a bit of self-preservation.  If the SEC did not take this action, then it faced the risk of legislation that would require the cost-benefit analysis in rule-making.  Some in Congress still want to press for such a statutory mandate.  That way, there would be no room for confusion as to what is expected from the SEC. 

Regardless of why the SEC is employing a cost-benefit analysis in its rule-making, it should only be seen as a positive development.  In the absence of such an analysis, we could be faced with, for example, a uniform fiduciary duty for anyone providing investment advice regardless of its costs.  Such a result would be problematic to say the least.