“Revolutionary Turnaround” for SEC’s Rulemaking

The Securities and Exchange Commission (SEC) should increase its use of cost-benefit analysis in making and reviewing its regulations, argues George Mason University Law School Professor Henry G. Manne in a recent paper. Manne criticizes the SEC for neglecting economic analysis in its rulemaking for too long and advocates for “a shift in the SEC’s orientation from law to economics.”

Manne is clearly not impressed with the SEC’s disclosure-based regulatory regime. He describes the agency’s rulemaking ethos as lacking “real intellectual credibility” and he faults the agency for having too few economists on staff. He argues that the agency should avoid using ideas about the market that are not empirically verified and that Congress should exercise oversight to ensure proper implementation of the agency’s use of economic analysis.

Despite his criticisms of the agency, Manne finds bright spots in two recent developments: Judge Douglas Ginsburg’s opinion in Business Roundtable v. SEC, and a recent SEC memorandum that “outlin[es] a highly sophisticated, comprehensive plan for cost-benefit analysis of SEC rules, both future and existing.”

In Business Roundtable, the Court of Appeals for the District of Columbia Circuit ruled that an SEC rule on proxy solicitation was “arbitrary and capricious” under the Administrative Procedure Act. Manne argues that Judge Ginsburg’s excoriation of the SEC only confirms his belief that “the agency doesn’t even do the kind of analysis that Congress has explicitly required it to do.”

Manne suggests that the SEC’s recent memorandum endorsing cost-benefit analysis could represent “a revolutionary turnaround.” In order to ensure that the agency’s implementation of the approach outlined in its memorandum produces a “far more effective regulatory system,” Manne makes several recommendations to the SEC.

First, he urges the SEC to stop using what he considers to be unrealistic notions of market failures. He writes that market failures from externality, market power, and principal-agent problems, while theoretically possible, should not be assumed to exist without actual evidence.

Second, Manne argues that the agency should not treat asymmetric information as inherently problematic. He points out that achieving full information is an unrealistic goal and, in any event, it should not be an end in itself, in his view.

Finally, Manne advocates congressional action to bind the SEC by law to justifying its rules with cost-benefit analysis. By requiring periodic reports and exercising other forms of congressional oversight, he suggests, Congress can ensure that the SEC’s institutional inertia and internal opposition do not derail its effort to change.