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SEC Inspector General Criticizes Cost-Benefit Analysis

On his final day with the SEC, outgoing Inspector General David Kotz issued a report criticizing the SEC for its cost-benefit analyses of Dodd-Frank rules.  Specifically, the report found that the extent of the quantitative discussion of cost-benefit analyses varied among rulemakings, the SEC sometimes used multiple inconsistent baselines in its cost-benefit analyses, and rulemakings lacked clear, explicit explanations of the justification for regulatory action.  The report also stated that "the SEC may not be fulfilling the essential purposes of such analyses-providing a full picture of whether the benefits of a regulatory action are likely to justify its costs and discovering which regulatory alternatives would be most cost-effective."  The report made several recommendations to improve cost benefit analyses, including that the SEC should:

  • Consider ways for economists to provide additional input;
  • Consider whether a pre-statute baseline should be used whenever possible;
  • Either specify a single consistent baseline to be used in the analysis or explain why multiple baselines are necessary; and
  • Consider directing rulemaking teams to more fully discuss the market failure or compelling social purpose that justifies regulatory action.

This report comes at a time when the SEC has received a number of public criticisms for inadequate cost-benefit analysis.  Most recently, the SEC's proposed proxy access rule was struck down last year for failing to adequately assess the economic effects of the rule.