The SEC and the Non-Cost Benefit Analysis Analysis (Part 3)
On Tuesday of last week, a House Subcommittee held a hearing titled "The SEC’s Aversion to Cost-Benefit Analysis." The chairman of the SEC listed a number of reforms in her testimony designed to improve the cost benefit analysis conducted by the SEC. For some witnesses, these steps were not enough.
Two witnesses called for a significant increase in the number of economists at the SEC. Dean Emeritus Manne had this to say:
There are presently 16 economists among the over-3000 employees of the SEC, and I believe that this is an all-time high number. Given the tasks of generating new rules under the Dodd-Frank law and that Act's additional requirement for cost-benefit studies of existing rules, the number of highly trained and competent economists necessary to complete this job in several years is more likely to be on the order of 100 to 150 if not more.
JW Verret from George Mason recommended that the SEC "freeze attorney hiring until it hires at least 200 more economists."
Both witnesses also suggested that these hires should not be accompanied by any increase in the SEC's budget. Dean Emeritus Manne suggested that there was no need for "additional funding" because the resources already existed "in the persons of what will soon be redundant lawyers and policy experts presently working on rule making in the 'old style.'" JW Verrett had a similar view. "The fact that it has misallocated resources in the past should not justify added appropriations, but instead suggests a need for reallocation of present resources."
In other words, by reallocating funds away from other employees (lawyers for example) in favor of additional economists, they are essentially calling for a simultaneous cut in the SEC's budget for all other programs. Yet for an already thinly stretched agency, the witnesses did not do any cost benefit analysis of their own proposal. There was no real attempt to weigh the costs of the cuts to other programs against the purported benefits of having 200 more economists.
But there is an even larger issue. In effect, the proposals call for a substantial increase in the resources devoted to cost benefit analysis. This will essentially make rulemaking more expensive and discourage agencies from engaging in the process (another possible consequence of the court's decision in Business Roundtable). This is a problem. Rulemaking is a system whereby agencies seek notice and comment from the public and give all interest groups an opportunity to participate in the approach to be implemented by the agency. In effect it is a more democratic form of policymaking.
Discouraging rulemaking eliminates this form of participation. Moreover, the effect will have broad effect. While burdening rulemaking may kill some initiatives in Dodd-Frank, it may also kill initiatives in the JOBS Act.
Moreover, in many cases, the agency will simply implement policies on a more informal, less inclusive basis, without resorting to notice and comment. By striking down the shareholder access rule, the DC Circuit effectively eliminated rulemaking and replaced it with a system of staff discretion under Rule 14a-8. The informal system imposes costs on companies, shareholders and the SEC. See Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors.