Business lobbyists and Republican lawmakers who failed to stop the Dodd-Frank Act from becoming law have managed to put the brakes on many of its provisions a second way: cost-benefit analysis.
A series of legal challenges from business groups against the U.S. Securities and Exchange Commission ended in a federal court ruling last year that the agency didn’t adequately analyze the cost of a new rule. In the months since, SEC rulemaking has ground to a near-halt, with just 24 agency economists working full-time to provide analyses for dozens of proposed policies, including 28 unfinished Dodd-Frank rules.
Now lawmakers are trying to write the cost-benefit strategy into law. The goal, said Representative Scott Garrett, a New Jersey Republican, is to save taxpayers money while also weakening the ability of regulators to implement Dodd-Frank.
“That may very well be the effect,” said Garrett, who is the chairman of the House Financial Services subcommittee with oversight of the SEC. “But if you stood next to me a proponent of Dodd-Frank, they should be willing, ready and able to support legislation that would make sure you’re not wasting money in the implementation of Dodd-Frank.”
The strategy has spread to target other federal agencies as well. In December, two groups representing Wall Street firms filed suit against the Commodity Futures Trading Commission, arguing that a rule to limit speculation used a flawed cost- benefit analysis. Last month, the U.S. Chamber of Commerce and the Investment Company Institute filed a similar lawsuit challenging a CFTC rule affecting mutual funds.
Letter to Regulators
The largest financial-industry trade groups sent a letter to the SEC, CFTC and banking regulators in February, urging them to conduct a “rigorous cost-benefit analysis” of a proposal for banning proprietary trading by insured banks. The letter was signed by the Securities Industry and Financial Markets Association, the Clearing House, the Financial Services Roundtable and the American Bankers Association.
In a separate February comment letter, Bank of America Corp. said regulators should write the so-called Volcker rule -- named for former Fed Chairman Paul Volcker, “informed by the cost-benefit analysis required” by last year’s court ruling.
Roel Campos, a former SEC commissioner, said the court decision combined with pressure from Capitol Hill could prevent the SEC and other agencies from moving forward with a wide variety of rules, not just those required by Dodd-Frank.
“The business community has been given a new powerful tool to use against any rulemakings they dislike,” said Campos, who is now a partner at the Locke Lord LLP law firm in Washington. “The standard will prevent the agency from being able to deal with anything that’s controversial.”
SEC rules still waiting to be completed include one that would require companies to disclose whether they use material that was mined in the Democratic Republic of the Congo and another that would govern executive compensation. A recently enacted law that eases securities regulation for closely held firms and newly public companies will also add to the SEC’s rule-writing responsibilities.
As the SEC’s to-do list gets longer, congressional pressure on the agency is intensifying. Since April 17, SEC Chairman Mary Schapiro has spent more than five hours before two House committees answering at least 50 questions about how the agency calculates the cost of rules it proposes.
Senator David Vitter, a Louisiana Republican, introduced legislation April 26 that would require the SEC to study the cost of its proposals. The bill is similar to one that Garrett is shepherding through the House.
“This shouldn’t be remarkable,” said Eugene Scalia, a lawyer at Gibson Dunn & Crutcher LLP in Washington. “It should be normal for federal agencies to look at how costly their rules are before imposing them.”
Scalia, son of Supreme Court Justice Antonin Scalia, helped lay the foundation that would ultimately spur debate in Congress. He won a case at the U.S. Court of Appeals in July that overturned an SEC rule that would have expanded shareholder rights. In the decision, U.S. Circuit Judge Douglas Ginsburg wrote that the SEC “inconsistently and opportunistically framed the costs and benefits” of the shareholder proposal.
Representative Patrick McHenry, a North Carolina Republican and chairman of a House Oversight and Government Reform subcommittee, told Schapiro during an April 17 hearing that the decision included “particularly harsh language” from the court.
Garrett said the results of the shareholder case, which was brought by the Chamber of Commerce and the Business Roundtable, was an “indicator that we’re not just speaking off the top of our head.”
“We’re actually speaking and are able to cite an independent third party: the court,” he said.
Schapiro has told lawmakers that calculating the cost and benefit of a rule is much harder than it sounds. Quantifying the benefits is particularly daunting, she said, because outcomes are often social improvements that are hard to quantify, such as increased transparency or enhanced financial stability.
“Quantifying costs is difficult but the task of quantifying benefits is very much more difficult because they are often very, very hard to put a dollar number on,” she said at the April 17 hearing. “Our challenge is to do the best we can.”
Schapiro is attempting to comply with the proposed legislation ahead of time by instructing staff that all rules must be accompanied by an analysis that explains why the regulation is necessary, identifies alternative approaches and considers the costs and benefits on both a quantitative and qualitative basis.
That isn’t enough, said Tom Quaadman, vice president of the Chamber of Commerce’s Center for Capital Markets Competitiveness.
“We think it’s a step in the right direction, but it’s only half a loaf,” Quaadman said in a telephone interview. “After two years, you should again have the economists reassess regulations to determine what the real costs are post- implementation.”
At the April 17 hearing, McHenry was more positive and thanked Schapiro for her “thoughtful attention to the concerns that we’ve raised.” Still, he expressed concern that rule- writers might try to exert influence over economists.
He referred to a Sept. 13, 2010, e-mail exchange in which Meredith Cross, director of the SEC’s corporate finance division, asked that economists “not add qualitative cost- benefit discussions that could be controversial without having senior discussions.”
The e-mail reveals a “deeply held cultural problem with cost-benefit analysis if you have to have senior level discussions before an economist attaches any real cost that could raise problem,” McHenry said.
Schapiro defended Cross to McHenry as “one of the finest public servants I have ever worked with” who “believes deeply in cost-benefit analysis.”
Judith Burns, an SEC spokeswoman, wouldn’t comment on the communication between rule-writers and economists.
Though Schapiro’s stance has been well-received by both Democrats and Republicans on Capitol Hill, it hasn’t ended scrutiny of the agency.
“Make no mistake, this subcommittee intends to vigorously monitor the implementation of this document at the commission,” McHenry told Schapiro. “We will hold Chairman Schapiro accountable for the commitments that she’s made.”
© Copyright 2022 Bloomberg News. All rights reserved.