SEC Leaders Emphasize Need for Economic Rigor in Rulemaking
Commentary by Steven Lofchie
At the 12th Annual Conference on Financial Market Regulation, SEC Chair Paul Atkins and Commissioner Hester M. Peirce stressed the importance of economic analysis in shaping regulatory policy and cautioned against regulatory overreach that could harm US capital markets.
Chair Atkins focused on the need to embed economic discipline into the rulemaking process, warning that "regulatory measures that impose unnecessary burdens" risk undermining both investor protection and capital formation. He emphasized that before proposing any rule, "we first must identify a problem to be solved and propose a resolution that is tailored to solve it—rather than create a solution in search of an unidentified problem." He also criticized recent SEC rulemakings that have failed to quantify costs and benefits, stating that future actions must "show our work so that the public understands what we are proposing and why." Calling economic analysis a "bedrock" principle of sound regulation, Chair Atkins pledged to "measure twice and cut once."
Commissioner Peirce critiqued the SEC's drift away from market-based fundamentals. Citing the SEC's recent rule on beneficial ownership disclosures, she criticized the agency for "invent[ing] investor harm," arguing that "information asymmetries... are a feature, not a bug, of our capital markets." (See related coverage.)
Ms. Peirce also questioned the current equity exchange landscape. She suggested that the proliferation of exchanges (21 compared to 11 in 2014) may be driven by regulatory arbitrage and not genuine market demand. While exchanges are burdened with filing requirements and self-regulatory obligations, alternative trading systems and internalizers operate under lighter rules and have become increasingly dominant. Ms. Peirce said: "Among the sixteen exchanges, half of them capture less than 1% of total market volume each."
Ms. Peirce floated the idea of scaling back the Order Protection Rule, and reconsidering the benefits and burdens of SRO status. She emphasized that "government should involve itself only where it can improve [markets'] functioning," adding that "markets arise and thrive on their own."
Commentary
In these remarks, Chair Atkins and Commissioner Peirce articulate a critical philosophical approach that stands in sharp contrast to the one taken by the previous administration. It is an important change and one for the better. There was hardly a rule adopted under SEC Chair Gensler where the economic justification did not seem a complete pretense for imposing more regulation. Take, for example, the SEC's analysis of the costs of the expansion of dealer registration (which has since been thrown out by the courts). The SEC took account of the costs of the stamps that a newly registered broker-dealer would have to purchase, but largely ignored the massive capital costs of the broker-dealer holding any assets other than US government securities.
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The SEC proposed amendments to agency rules governing beneficial ownership reporting.