Thursday, September 22, 2011

Senator Shelby Introduces Legislation Reforming Federal Financial Regulatory Process

Senator Richard Shelby (R-AL), Ranking Member on the Banking Committee has introduced the Financial Regulatory Responsibility Act of 2011, which holds federal financial regulators such as the SEC and CFTC accountable for rigorous, consistent economic analysis on every new regulation they propose. The legislation would require the SEC and CFTC to provide clear justification for the regulations and determine the economic impacts of proposed rulemakings, including their effects on growth and net job creation. In addition, the legislation mandates that if a regulation’s costs outweigh its benefits, regulators are barred from promulgating it. The Financial Regulatory Responsibility Act of 2011 is cosponsored by all Republican members of the Banking Committee and is supported by former SEC and CFTC Chief Economists. Senator Shelby has written a letter to Banking Committee Chairman Tim Johnson (D-SD) requesting a hearing on the Financial Regulatory Responsibility Act.

The Financial Regulatory Responsibility Act is the culmination of a series of actions taken by Banking Committee Republicans over the past several months. In February, committee Republicans wrote to financial regulators urging them to take more seriously public comments and cost-benefit analyses of proposed rules. In May, committee members wrote to the Inspectors General (IG) of the financial regulators requesting that they evaluate the economic analysis performed by their respective agencies. Upon receipt of the IG reports, Senators Shelby and Crapo (R-ID), ranking Republican on the Subcommittee on Securities, issued a statement regarding their serious concern with many of the issues raised. In July, Senator Shelby called for Congressional action when a panel of the DC Circuit struck down the SEC’s proxy access rule because the court found that the SEC failed to adequately consider the economic effects of the rule.

Many of the proposed Dodd-Frank rules contain cursory, boilerplate cost-benefit analyses that do little to quantify the rules’ costs and benefits and their effect on the economy, said Senator Crapo, who added that the panel's unanimous decision to invalidate the SEC proxy access rule for failing to adequately analyze its economic costs reaffirms that economic analysis matters and that a check-the-box mentality will not suffice. By requiring federal financial regulators to conduct meaningful economic analysis, he said, there will be better regulations that can withstand scrutiny of whether the benefits of the proposed rule outweigh its cost.

The Financial Regulatory Responsibility Act ensure that all financial regulators conduct comprehensive and transparent economic analysis in advance of adopting new regulations. It sets forth the factors that agencies must consider in their analysis, allows the public to comment, and requires the agency to revisit the effectiveness of the rule five years after it takes effect. The bill would also establish a Council of Chief Economists from the federal financial regulators to bolster the quality of economic analysis being conducted and to ensure that the financial regulators work together to understand the aggregate effects that financial regulations are having on the economy. Through a judicial review mechanism, the legislation would ensure that the agencies take their new economic analysis requirements seriously. Finally, the bill would mandate that a rule does not take effect if its costs outweigh its benefits.

Former SEC Chief Economist Chester Spatt said that the legislation would heighten the regulatory emphasis on the underlying economics and on undertaking after-the-fact assessments of regulatory impacts. Former CFTC Chief Economist Jeff Harris said that the recommended Chief Economist Council is particularly innovative, and holds the promise to improve interagency cooperation and to give economists more visibility beyond the walls of an individual agency.