Yesterday the House Committee on Oversight and Government Reform Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs held a hearing titled “The SEC’s Aversion to Cost-Benefit Analysis.”

Among others, Chairman Schapiro testified (see list below). The 2 ½ hour hearing went as expected with Chairman McHenry (R-NC) and the other Republican Members making strong comments about the importance of SEC doing cost benefit analysis before proposing a rule and citing the proxy-access case. In contrast Democratic Members said SEC has been trying to do its best with limited funds and cost benefit analysis must not be used to delay needed consumer protections and such analysis likely would not have helped prevent an AIG type crisis. Rep. Maloney (D-NY) noted that the SEC has issued 53 rules since DFA and only one has been over turned, which is a good record. Chairman Schapiro explained her commitment to the new SEC cost benefit analysis guidance so we can expect to see more requests for information for data from industry before a rule is proposed. Additionally she noted the burden that DFA added necessarily requires more funding for SEC to hire lawyers and economists do its job. There was no discussion about standards of care, annuities or definition of swaps that we have been monitoring. However, there was brief mention of insurance and fiduciary duty in written testimony (excerpt below) submitted by Mr. Bullard of Mississippi School of Law.

Excerpt from Written Testimony from Mr. Bullard:

“Econometric analysis is an important part of the rulemaking process, but no econometric model has ever captured the cost, for example, to senior Americans suffering from cognitive impairment when they are cheated of their life savings by unscrupulous broker‐dealers selling unsuitable insurance products.

The cost‐benefit standards in H.R. 2308 stack the deck against soft costs and benefits that are difficult to quantify, such as those that assume that investors’ decisions do not necessarily reflect their best interest. The forms of cognitive impairment that are common among retail investors have been well‐documented in the behavioral finance literature, but the precision of monetary estimates of the cost of poor decision-making ‐‐ if monetary estimates are even possible ‐‐ cannot compete, for example, with the precision of estimates of the costs of updating software systems, and printing and delivering documents that a new disclosure requirement often entails. The benefits of mutual funds’ having an independent chairman, or subjecting broker‐dealers who provide personalized investment advice to a fiduciary duty, or requiring broker‐dealers who receive far more compensation for selling one product than another to disclose their conflict of interest, or requiring that public companies include minority shareholders’ board nominees in their proxy solicitations, are only some of the kinds of benefits that are already discounted in cost‐benefit analyses.”

Panel 1
The Honorable Mary Schapiro (testimony)
U.S. Securities and Exchange Commission

Panel 2
Mr. H. David Kotz (testimony)
Managing Director, Gryphon Strategies
(Former Inspector General, U.S. Securities and Exchange Commission)

Henry Manne, Ph.D. (testimony)
Dean Emeritus
George Mason University School of Law

Ms. Jacqueline McCabe (testimony)
Executive Director for Research
Committee on Capital Markets Regulation

Mr. J.W. Verret (testimony)
Assistant Professor of Law
George Mason University School of Law

Mr. Mercer E. Bullard (testimony)
Jessie D. Puckett, Jr., Lecturer and Associate Professor of Law
The University of Mississippi School of Law