In June 2011, the SEC Office of Inspector General released a Phase I report on the results of its initial assessment of the cost-benefit analyses conducted for six rulemakings. The OIG concluded that the SEC had conducted a systematic cost-benefit analysis for each of six rules studied, but found that the level of involvement of the Division of Risk, Strategy, and Financial Innovation (RiskFin) varied considerably from rulemaking to rulemaking. In addition, the Phase I review found a lack of macro-level analysis and a lack of quantitative analysis on the impact of the rules. In the report on Phase I, the SEC OIG stated our intention to further analyze these areas.

The SEC OIG has issued its follow-up Phase II analysis.  Based on the results of the review, the OIG made the following recommendations:

• SEC rulewriting divisions and RiskFin should consider ways for economists to provide additional input into cost-benefit analyses of SEC rulemakings to assist in including both quantitative and qualitative information to the extent possible.
• The Office of the General Counsel, in consultation with RiskFin, should reconsider its guidance that the SEC should perform economic analyses for rulemaking activities to the extent that the SEC exercises discretion and should consider whether a pre-statute baseline should be used whenever possible.
• SEC rulemaking teams should generally use a single, consistent baseline in the cost-benefit analyses of their rulemakings related to a particular topic. The baseline being used should be specified at the beginning of the cost-benefit analysis section. If multiple baselines are appropriate, such as for evaluating alternative approaches or explaining the SEC’s use of discretion, they should also be explained and justified.
• SEC rulewriting divisions should consider discontinuing the practice of drafting separate cost-benefit analysis and efficiency, competition, and capital formation sections and instead provide a more integrated discussion of these issues in rule releases.
• The Commission should consider directing rulemaking teams to (a) explicitly discuss market failure as a justification for regulatory action in the cost-benefit analysis of each rule that is based in whole or in part on perceived market failure or (b) in the absence of market failure, demonstrate a compelling social purpose that justifies regulatory action.
• SEC rulemaking teams should consider including internal costs and benefits in the cost-benefit analyses of rulemakings.

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