Measuring the Costs and Benefits of New Rules
Chairman McHenry, Ranking Member Quigley, and members of the Committee, I want to thank you for the opportunity to testify today. My name is J.W. Verret. I am an Assistant Professor of Law at George Mason Law School, where I teach corporate and securities regulation, and a senior scholar with the Mercatus Center at George Mason University.
In September of 2011, I had the opportunity to testify before House Committee on Financial Services on this topic, where SEC staff were also present. It was argued that economic analysis is not always required when rules are mandated under legislation, and in any event measuring the impact of new rules can be prohibitively difficult.
I am aware that the SEC staff have prepared a memo on cost-benefit analysis in the past few weeks that represents a profound shift in the SEC's thinking. I want to congratulate the Commission and the Staff for their willingness to reconsider that position in this new memo. It remains to be seen whether that memo is just a memo, or will be put into practice in future rulemaking.
After a careful review of the legislative requirements that the SEC consider investor protection, efficiency, competition and capital formation in adopting new rules, I would like to simply offer a list of six items that would demonstrate a sincere commitment by the SEC to fulfill its statutory mission. The first five I will list are in fact required by law if one carefully reads the legislative and judicial history of the SEC’s mandate to consider the economic impact of new rules.
I offer this list as a test of the SEC’s resolve to make economic analysis a real constraint on SEC rulemaking and a limit on the pressures it may face to politicize its activities and undermine its investor protection mission.
1) Rules must have sunsets and look back requirements when the agency represents that costs and benefits are difficult to estimate, as it represented in rulemaking pursuant to Section 404(b) of Sarbanes Oxley. At times, much of the data relevant to a rule’s costs and benefits will not be available until years after its implementation. This is demonstrated by the SEC’s rulemaking under Sarbanes Oxley 404(b), where the SEC initially estimat