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From Securities Regulation Daily, May 6, 2013

House Panel Sets Markup of SEC Regulatory Accountability Act as Majority Leader Cantor Sees May Floor Vote

By Jim Hamilton, J.D., LL.M.

The House Financial Services Committee is set to markup legislation directing the SEC to conduct thorough cost-benefit analyses of its regulations and proposed regulations. Under the SEC Regulatory Accountability Act, H.R.1062, the SEC must ensure that the benefits of its regulations outweigh the costs. The legislation was introduced by Rep. Scott Garrett (R-NJ), Chairman of the Subcommittee on Capital Markets, with ten original cosponsors. The legislation also expresses the sense of Congress that other regulators and self-regulatory bodies, including the PCAOB and the MSRB, and any national securities association registered under the Exchange Act, should also follow the requirements set forth by H.R. 1062. In a memo to his caucus as reported on Politico, House Majority Leader Eric Cantor (R-Va) indicated that H.R. 1062 would be brought to the House floor for a vote sometime in May.

According to Chairman Garrett, the SEC Regulatory Accountability Act would require the SEC to abide by President Obama’s Executive Order 13563 that government agencies conduct robust cost-benefit analyses to ensure that the benefits of any rulemaking outweigh the costs and that both new and existing regulations are accessible, consistent, written in plain language, and easy to understand. As an independent agency, the SEC is not required to follow the Executive Order. While the SEC has indicated that it intends to abide by the Executive Order, the legislation is designed to codify the Executive Order and require this Commission and future Commissions to abide by it.

Cost-benefit analysis. Specifically, the SEC Regulatory Accountability Act would direct the SEC, before issuing a regulation under the securities laws, to identify the nature and source of the problem that the proposed regulation is designed to address in order to assess whether any new regulation is warranted and to use the SEC Chief Economist to assess the costs and benefits of the intended regulation and adopt it only upon a reasoned determination that its benefits justify the costs.

Alternatives. The SEC would also have to identify and assess available alternatives that were considered and ensure that any regulation is accessible, consistent, written in plain language, and easy to understand. Under a modified comply-or-explain provision in the bill, the SEC would be required to explain why the regulation meets the regulatory objectives more effectively than the alternatives.

Other considerations. In addition, H.R. 1062 would require the SEC to consider whether the rulemaking will promote efficiency, competition, and capital formation and the impact of the regulation on investor choice, market liquidity, and small business. The Commission must also evaluate whether the regulation is consistent, incompatible, or duplicative of other federal regulations.

Comments. The Commission must also explain in its final rule the nature of comments received concerning the proposed rule or rule change and respond to those comments, explaining any changes made in response, and the reasons that it did not incorporate industry group concerns regarding potential costs or benefits.

Review of existing regulations. Further, within one year of enactment, and every five years thereafter, the SEC must review its existing regulations to determine if they are outmoded, ineffective, insufficient, or excessively burdensome and must modify, streamline, expand, or repeal them in accordance with such reviews.

Major rule. Whenever it adopts or amends a major rule, the SEC must state in the adopting release the purposes and intended consequences of the regulation, the post-implementation quantitative and qualitative metrics to measure the economic impact of the regulation and the extent to which it has accomplished the stated purposes, the assessment plan that will be used under the supervision of the Chief Economist to assess whether the regulation has achieved those purposes, and any foreseeable unintended or negative consequences.

For purposes of the Act, Title 5 of the U.S. Code, Section 804(2) defines three alternative ways a regulation can become a major rule under H.R. 1062: It is likely to result in: (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, federal, state, or local government agencies, or geographic regions; and (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.-based enterprises to compete with foreign-based enterprises.

Assessment plan. The assessment plan for a major rule must consider the costs, benefits, and intended and unintended consequences of the regulation and specify the data to be collected, the methods for its collection and analysis, and an assessment-completion date.

In any event, the SEC Chief Economist must submit the completed assessment report to the Commission no later than two years after the publication of the adopting release, unless the Commission, at the request of the Chief Economist, has published, at least 90 days before such date, a notice in the Federal Register extending the date and providing specific reasons why an extension is necessary.

Within seven days after submission to the Commission of the final assessment report, it must be published in the Federal Register for notice and comment. Any material modification of the plan, as necessary to assess unforeseen aspects or consequences of the regulation, must be promptly published in the Federal Register for notice and comment.

Within 180 days of publication of the assessment report in the Federal Register, the SEC must issue for notice and comment a proposal to amend or rescind the regulation or publish a notice that the Commission has determined that no action will be taken on the regulation. Such a notice will be deemed a final agency action.

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