Lacking in Cost-Benefit Analysis? The Analysis

PHOENIX -- What is “really lacking” in the cost-benefit analysis that is required of Securities and Exchange Commission rule-making by the Dodd-Frank Wall Street Reform Act? Cost-benefit analysis.

That, at least, was the contention of Michael J. Downer, senior vice president of Capital Research and Management Company at the Investment Company Institute Mutual Funds and Investment Management Conference here.

“There is very little consideration of the broader economic impact of these rules,’’ he said in a discussion of regulation by the SEC, including 12b(1) fees and the Dodd-Frank mandated study of the effect of legal and regulatory changes that would affect brokers and investment advisors with a revised fiduciary standards rule.

“What really overhangs the SEC rulemaking these days’’ is the lack of clear cost-benefit analysis, he said. His firm is part of the Capital Group Companies, one of the world’s largest investment management organizations with assets of about $1 trillion under management through American Funds and other vehicles.

He cited research conducted by a different research organization, the Committee on Capital Markets Regulation, that is headed by Glenn Hubbard, Dean of Columbia Business School, and John L. Thornton, Chairman of the Brookings Institution.

That group on March 7 sent a letter and report to Congress that looked at 192 rules mandated by Dodd-Frank. In that market basket of rules, the committee found:

▪ 57 Rules contain no cost-benefit analysis. Some of the work on these rules “either reference review that has been conducted by the Office of Management and Budget or suggest that no cost-benefit analysis is required because the rule is not expected to have significant impact or because the costs were imposed entirely by Dodd-Frank,’’ it said.

▪ 85 Rules contain cost-benefit analysis that contain no numbers, i.e., quantitative analysis. This includes “numerous Rules where rulemakers have said they expect costs to be insignificant or minimal,’’ it said.

▪ 50 Rules contain limited quantitative cost-benefit analysis. “The vast majority limit their cost-benefit analysis to a review of the costs of paperwork, legal and compliance review, technology enhancements, and the like and do not contain any analysis of the expected broader economic impact of the rule,’’ it said.

That summary point was echoed by Downer, who said substantive cost-benefit analysis was imperative particularly since a District of Columbia Circuit court last July struck down the SEC’s proxy access rule.

The three-judge panel held that the SEC’s proxy access rule was “arbitrary and capricious” because the SEC failed “adequately to assess the economic effects of a new rule.”

Downer said the pursuit of cost-benefit analyses is not just a conservative ploy being used to stop rule-making. Commodity Futures Trading Commission member Bart Chilton two weeks ago said that the financial industry was “bastardizing” the rule-making process by trying to block implementation of rules that do not have what they consider to be adequate cost-benefit analysis.

Capital markets firms and industry organizations, he said, are filing or threatening to file ‘spurious’ lawsuits over whether adequate analyses have been completed in advance of the rules being implemented.

In December, the International Swaps and Derivatives Association, Inc. (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) filed suit in federal court in the District of Columbia, challenging Commodity Futures Trading Commission’s (CFTC) final rules that limit the positions that investors may own in certain commodities. The trade groups alleged that the CFTC:

* Erred in concluding that the Dodd-Frank Act required it to establish position limits without first determining whether they were even necessary;

▪ Failed to present a reasoned analysis or consider all evidence in setting position limits;

▪ Failed to conduct an adequate cost-benefit analysis as required by law;

▪ Conducted a flawed rulemaking process that prevented commenter’s from meaningfully participating.

In the SEC case, cost and benefit in analysis rule-making has to be “put in context,’’ Eileen Rominger, Director of the Division of Investment Management at the SEC said on the regulatory panel on which Downer spoke.

Rominger said the SEC is “devoting considerably more resources in this area” and is adding two cost-benefit analysts to its staff.

These analysts will “augment” the work of staff already conducted on cost-benefit analysi in the SEC’s Division of Risk, Strategy and Financial Innovation, she said.

She said the addition of resource and effort to make the analyses does mean there could be “a different timeline to policy initiatives.”

Meaning: New rules will take longer to complete and implement.