House Panel Approves SEC Regulatory Accountability Act, Full House Vote Expected This Month

The House Financial Services Committee has approved, by a 31-28 vote, legislation directing the SEC to conduct a thorough cost-benefit analyses of its regulations and proposed regulations. Under the SEC Regulatory Accountability Act, H.R. 1062, the SEC must ensure that the benefits of its regulations outweigh the costs. The legislation was introduced by Rep. Scott Garrett (R-NJ), Chair of the Subcommittee on Capital Markets, with ten original cosponsors. The legislation also expresses the sense of Congress that other regulators and self-regulatory bodies, including the PCAOB and the MSRB, and any national securities association registered under the Exchange Act, should also follow the requirements set forth by H.R. 1062. House Majority Leader Eric Cantor (R-VA) has indicated that H.R. 1062 is currently scheduled for full consideration sometime in May.

FSC Chair Jeb Hensarling (R-TX) described H.R. 1062 as common sense legislation that requires the SEC to consider the impact of regulations on jobs and the economy. This is simply codifying what then SEC Chair Mary Schapiro said that the Commission intended to do, he noted, adding that this is a minimal expectation from federal financial regulators.

Ranking Member Maxine Waters (D-CA) opposes H.R. 1062 because it would add a number of additional factors to the cost-benefit analysis that the SEC would have to do and, among other things, impede the Commission’s implementation of the Dodd-Frank Act.

Similarly, in a letter to Chairman Hensarling and Ranking Member Waters, state securities administrators said that H.R. 1062 would require the SEC to conduct new and unreasonably extensive analyses prior to issuing a regulation. The SEC would be permitted to adopt a rule only upon a reasoned determination that the rule’s benefits justify its costs. The SEC must determine, and measure, the effectiveness of a rule even prior to its adoption, said NASAA, and without assessing its ultimate impact on investor protection. Ranking Member Waters had mentioned that the phrase investor protection is absent from the legislation. According to NASAA, the bill also requires the SEC to consider an unduly broad range of considerations before issuing a rule that are much more expansive, and in certain cases, more vague than what is currently required.

Cost-Benefit Analysis. Specifically, the SEC Regulatory Accountability Act would direct the SEC before issuing a regulation under the securities laws to identify the nature and source of the problem that the proposed regulation is designed to address in order to assess whether any new regulation is warranted and to use the SEC Chief Economist to assess the costs and benefits of the intended regulation and adopt it only upon a reasoned determination that its benefits justify the costs.

The SEC would also have to identify and assess available alternatives that were considered; and ensure that any regulation is accessible, consistent, written in plain language, and easy to understand. Under a modified comply or explain provision in the bill, the SEC would be required to explain why the regulation meets the regulatory objectives more effectively than the alternatives.

In addition, H.R. 1062 would require the SEC to consider whether the rulemaking will promote efficiency, competition, and capital formation and the impact of the regulation on investor choice, market liquidity, and small business. The Commission must also evaluate whether the regulation is consistent, incompatible or duplicative of other federal regulations.

The Commission must also explain in its final rule the nature of comments received concerning the proposed rule or rule change and respond to those comments, explaining any changes made in response, and the reasons that it did not incorporate industry group concerns regarding potential costs or benefits.

Review of Existing Regulations. Further, within one year of enactment and every five years thereafter, the SEC must review its existing regulations to determine if they are outmoded, ineffective, insufficient, or excessively burdensome; and modify, streamline, expand, or repeal them in accordance with such reviews.

Major Rule. Whenever it adopts or amends a major rule, the SEC must state in the adopting release the purposes and intended consequences of the regulation, the post-implementation quantitative and qualitative metrics to measure the economic impact of the regulation and the extent to which it has accomplished the stated purposes, the assessment plan that will be used under the supervision of the Chief Economist to assess whether the regulation has achieved those purposes, and any foreseeable unintended or negative consequences.

For purposes of the Act, Title 5, U.S. Code, Section 804(2) defines three alternative ways a regulation can become a major rule under H.R. 1062: It is likely to result in: 1) an annual effect on the economy of $100 million or more; 2) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; 3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.-based enterprises to compete with foreign-based enterprises.

Assessment Plan. The assessment plan for a major rule must consider the costs, benefits, and intended and unintended consequences of the regulation; and specify the data to be collected, the methods for its collection and analysis, and an assessment completion date.