SEC takes defensive measures on rulemaking

The US regulator is taking greater care to demonstrate its rulemaking has more benefit than cost as a result of some recent court challenges.

Last month the Securities and Exchange Commission (SEC) circulated guidelines to its staff on what a cost-benefit report should contain and how it must be structured. In the past this analysis has been challenged by stakeholders, leading to rules being overturned in the US Court of Appeals.

Another shift in strategy has been involving economists earlier in the rulemaking process to help identify the economic effects of draft policy. 

The SEC is required by law to evaluate the economic costs and benefits of its rules. Stakeholders in turn have the power to challenge the SEC’s judgement in court.  This, believes one New York-based attorney, has been the driving force behind the SEC’s greater care in analysis. 

The SEC is currently implementing, or beginning to enforce, rules over the private equity industry that were mandated by the Dodd-Frank Act. One such rule is the so-called “Volcker rule” which limits US banks’ investment in private equity to no more than three percent of their Tier-1 capital, with an additional restriction from acquiring no more than a three percent ownership stake in any fund.  

Recently passed rules, such as the Form PF reporting requirement, or the requirement that certain private equity firms register with the SEC, could theoretically be handed a lawsuit. 

The New York-based attorney thinks the new guidance is unrelated to the toughness of the rules that the SEC would propose for private equity. However the attorney added: “You would expect the SEC to be more sensitive when imposing rules, especially of cost.”