Lee on Economic Analysis in SEC Rulemaking

Yoon-Ho Alex Lee has posted The Efficiency Criterion for Securities Regulation: Investor Welfare or Total Surplus? on SSRN with the following abstract:

Recent regulatory debates have centered on whether independent agencies should be subjected to a more rigorous cost-benefit analysis requirement than their current mandates or should otherwise be required conduct cost-benefit analysis that conforms to the Office of Management and Budget’s guidance under Circular A-4. The Article closely examines the way in which one particular agency--the Securities and Exchange Commission (the “SEC”)--conducts its economic analysis in rulemaking. The SEC’s economic analysis, conducted pursuant only to its statutory mandate to consider the effects on “efficiency, competition, and capital formation,” mainly compares benefits that would accrue to investors against out-of-pocket compliance costs to be incurred by regulated entities. Circular A-4, by contrast, recommends a total surplus approach, whereby benefits and costs are considered from the perspective of all market participants, without making any value judgment as to which parties are inherently more deserving of surpluses. The current debates therefore raise an urgent policy question for the SEC: whether it makes sense to have the agency consider costs and benefits of its rules from the perspective of total surplus, or instead have it consider them from the perspective of investors only. This Article raises three points pertaining to this debate. First, because the two approaches provide conflicting standards for considering whether a rule’s benefits outweigh costs, unless there is first a general consensus regarding the efficiency criterion for SEC rules, no meaningful discussions can take place as to requiring the SEC to conduct more extensive cost-benefit analyses. Second, because Circular A-4 provides a broader perspective of considering costs and benefits, those concerned exclusively with investors’ economic welfare should have reasons to oppose, rather than support, applying Circular A-4’s approach to SEC rules. Third, despite such reasons, there is nevertheless a case for preferring Circular A-4’s approach because a total surplus approach, if used properly, offers several important benefits from policy perspectives.