Thursday, September 15, 2011

SEC Chair Schapiro Has Concerns with House Draft Legislation Impacting Rulemaking

In testimony before the House Financial Services Committee, SEC Chairman Mary Schapiro discussed two pieces of legislation that would restructure the SEC's organization and significantly impact the Commission's rulemaking process. The
first, the SEC Modernization Act of 2011, would significantly restructure the SEC by, among other things, reducing the number of SEC’s divisions, restructuring the Office of the Chairman, and modifying certain new offices created by the Dodd-Frank Act.

The Chair said that the SEC is reviewing similar recommendations from a Dodd-Frank mandated study to evaluate improvements in the structure, operations and processes of the agency. While she agrees with several of the approaches proposed by the draft legislation, there are provisions of the bill that cause the SEC Chairman real concern, one of which is the overarching loss of the agency’s flexibility in the future to change with the dynamic capital markets if its structure is rigidly established by statute. The Chair would welcome an opportunity to work with the Committee on this legislation.

The second bill is H.R. 2308, the SEC Regulatory Accountability Act, which would establish a significant number of additional specific standards for cost-benefit analyses for Commission rules and orders. She noted that statutory requirements already explicitly require the Commission to consider the economic effects of its rules, and economic and cost-benefit analyses are fundamental components of the Commission’s rulemaking process.

The draft enumerates eleven new factors for the SEC to consider in its economic analysis, each of which would create a new potential challenge to future rules. Moreover, a number of these new factors are potentially in conflict with the SEC’s mission, duplicative of existing requirements, unrelated to SEC rulemaking, or unclear in scope. For example, the bill’s
direction to assess the best ways of protecting market participant could conflict with the SEC’s mission to protect investors, which in some cases means protecting them from certain market participants.

Additionally, while clear statutory statements of components of cost benefit analyses provide useful direction, observed Chairman Schapiro, those standards should apply similarly to all federal financial regulators and must be consistent with the mission. But the requirements under the draft would be more extensive and more onerous than the requirements placed on other agencies, she averred. The bill would apply not only to rules, but also to orders, which could significantly impede the SEC’s ability to administer the securities laws. Requiring cost-benefit analyses for orders could undermine the SEC's ability to issue enforcement orders against wrongdoers, delay exemptive orders needed to facilitate the introduction of new investment products to the market, and impede the capital formation process by delaying orders to registrants that accelerate the registration of their securities.

While concern about the appropriate balance between costs and benefits of rules is a very valid consideration in rulemaking, acknowledged the Chair, any statutory requirements should provide clear direction and include achievable standards. Otherwise, the result will be a rulemaking process that is incapable of implementing Congress’ statutory directions and is consistently subject to challenge.

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