Show Me the Money: SEC Changing the Way It Calculates the Financial Burden of New Rules

Investment adviser complianceThe U.S. Securities and Exchange Commission (SEC) is creating a new method for determining the cost of its regulations, Chairman Mary Schapiro recently stated in testimony before a Congressional committee. The changes come after court decisions and lawmakers have questioned past economic analysis.

The change is good news for investment advisers, who have shouldered a number of significant regulatory changes in recent months and may face more in the future.

The new guidance also follows a recent Office of the Inspector General (OIG) report that suggests that the SEC fails to consider the economic effects of rules mandated by the Dodd-Frank Act.  The OIG Report recommends that the staff consider using, whenever possible, a pre-statute baseline – that is, to consider the costs and benefits of the statute, not just those portions of the rule over which the Commission exercises discretion.

With this in mind, the new guidance “states that as a policy matter, where a statute directs rule making, rule writing staff should consider the overall economic impacts, including both those attributable to congressional mandates and those that result from an exercise of the Commission’s discretion,” Schapiro said. “This approach should allow for a more comprehensive evaluation of alternative means of meeting a statutory mandate and give the most complete picture of a rule’s economic effects.”

Additional steps the SEC is taking include the following:

  • Earlier and more comprehensive involvement of Division of Risk, Strategy, and Financial Innovation (RSFI)  staff in the rulemaking process, so that RSFI economists can provide economic analysis of different policy options ;
  • Assuring that rule releases clearly identify the justification for the proposed rule;
  • Where a statute directs rulemaking, staff should consider the overall economic impacts of the rule;
  • Where feasible, quantifying the costs and benefits and, where not feasible, transparently explaining why not;
  • More integrated analysis of economic issues, including efficiency, competition, and capital formation, in the rule releases;
  • More explicit encouragement to commenters to provide quantitative, verifiable estimates of costs and benefits, and fuller analysis and discussion in Commission rule releases of the cost-benefit information received from commenters; and
  • Greater discussion of reasonable alternatives not chosen.

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