On May 17th the U.S. House of Representatives by a 235-161 vote (including 17 Democrat supporters) approved the SEC Regulatory Accountability Act of 2013 (the “Accountability Act”). The Accountability Act directs the SEC to engage in mandatory cost benefit analysis of every proposed regulation. Specifically, the Accountability Act requires the SEC to assess the significance of the problem the regulation is designed to address, determine if its estimated costs justify its estimated benefits, and identify available alternatives. Additionally, the SEC would have to measure potential job creation, or losses, as the result of an issued rule.
If the Accountability Act becomes law, the SEC would also be required to review its regulations every five years to determine whether they are “outmoded, ineffective, or excessively burdensome” and to consider modifying or repealing regulations which are found to be so.
If a proposed regulation is expected to have an economic impact greater than $100 million annually the SEC is required to develop and publish a plan to assess whether the regulation has achieved its stated purposes. The assessment must be published within two years after adoption of the regulation and must include consideration of costs, benefits, and consequences, using performance measures that were identified when the rule was adopted.
How important is this? Not at all if the bill dies in the Senate (where govtrack.us gives it a 15% chance of passing) or if it is vetoed by the White House as President Obama has indicated is possible. However, if it survives those hurdles, according to Accountability Act proponent Rep. Jeb Hensarling (R-TX) Chair of the Financial Services Committee its requirements “offer a “common sense” approach that forces government officials to assess the costs and consequences of its actions the same way families struggling to make ends meet tackle “kitchen-table economics.” Further, proponents argue that the Accountability Act does little more than reiterate an executive order issued by President Obama in 2011 calling for all regulatory agencies to commit to more comprehensive assessments of the costs and benefits inherent in any new rules, craft regulations in “plain language,” and review past actions in an effort to modify, or weed out, outdated and excessively burdensome regulations. As an independent agency the SEC is not bound by this Executive Order but has promised to comply with it.
Dale Brown, president and CEO of the Financial Services Institute, believes the bill has “the potential to save Main Street investors and financial services providers significantly more," as "unclear and inefficient regulations drive up compliance costs and increase litigation expenses for those serving the financial and securities industry, and this in turn raises the cost of investment and retirement planning for investors.”
Business Roundtable weighs in “[r]egulation has provided substantial benefits to the country, but it has done so at a high cost. We believe the country can achieve its statutory objectives at less cost through a process we call “smarter regulation.” Smarter regulation is based on several principles, including early engagement of regulators with the public, the use of quality information, objective analysis of regulatory alternatives, consideration of costs and benefits, expert oversight, and legislative accountability.”
Sounds pretty convincing, right? We are all for smart regulation that saves investors’ money. Then why has President Obama threatened to veto the Accountability Act? According to detractors, the bill is an underhanded attempt to give Wall Street veto power over any regulation it does not like. They argue that the bill would essentially cripple the SEC, diverting resources from rulemaking and enforcement. They note that the SEC is already required to conduct economic analysis on every rule it passes, and to examine the effect of its rulemakings on capital formation, market efficiency, and competition and argue that the proposed legislation “would force the agency to measure costs and benefits of a new rule before that rule was even implemented or market data resulting from the rule was available. The bill also imposes enormously broad and vague mandates such as determining whether a regulation imposes the ‘least burden possible’ among all possible regulatory options. A court could overturn the SEC’s decision in any case where it found any one of the numerous analyses required here to be inadequate. The vagueness of mandates like the ‘least burden possible’ means that court challenges or court decisions could rest on claims that are essentially speculative and theoretical. These new mandates would not improve the quality of the regulatory process; they would stop it in its tracks.”
Also opposing the bill is SEC Chairwoman Mary Jo White who told members of the House Financial Services Committee that while she’s “a firm supporter of economic analysis," she has "concerns about this bill.” Not only would it add additional requirements but it would put the agency’s rules “under constant challenge.”
“H.R. 1062 is a regulatory ‘accountability' act only if you believe that the SEC's primary accountability should be to the securities firms it is supposed to regulate rather than to the public it is supposed to protect,” says Barbara Roper, director of investor protection for the Consumer Federation of America. “This bill would further slow the already glacial regulatory process and further empower Wall Street interests to derail needed reforms.” Roper adds that the bill fails its own cost-benefit test as “sponsors appear to have ignored its significant costs,” estimated by the Congressional Budget Office to be $23 million for implementation.
Yet another strong critique comes from former SEC Chairman Arthur Levitt who argues that the bill will “gut” the SEC given the increased costs it would impose on the SEC at a time when Congress is defunding the agency.
Rep. Gwen Moore (D-WI) states bluntly that the while the bill is terrible for investors, it is also not good for industry. “It would mean that rulemakings would take even longer, as the SEC struggled to meet the impossibly subjective economic cost-benefit standard to stave off the coming court battle over competing economic impact projections. The ink would not be dry on a SEC rule before the race to the courthouse door to challenge the regulations would begin. Presumably, the most powerful industry participants would challenge the rules in the way that achieves their narrow interest, which may be to the detriment of investors or other less-affluent market participants. In this way, the most powerful industry interests would be able to not only use the courts to undo consumer protections, but to also seek competitive advantage over competitors.
In Congress, I hear a lot from the financial industry about "uncertainty." There would never be certainty in securities markets if this bill were to ever become law. However, my primary concern is not for industry. It is for the People. The bill would eventually degrade consumer protection in financial markets until no investor could have faith in U.S. financial markets. The bill would allow firms and markets to operate unchecked. The industry with the best lawyers would reign, regardless of business model, practices, or any other market consideration. Congress would be powerless to help. This legislation rejects the lessons of the financial crisis and statutorily mandates the mistakes that led to it, with the taxpayers on the hook.”
Business Roundtable and others have already scored victories challenging SEC cost-benefit analysis in the courts. If the Accountability Act becomes law their efforts to block and stall regulation will grow exponentially. Even if the bill does not make it through this time around, sponsors can try again with a more amenable Congress and President.