Note: Judicial Review of SEC Rules: Managing the Costs of Cost-Benefit Analysis

By Rachel A. Benedict. Full text here.

In the past seven years, the D.C. Circuit has vacated three Securities and Exchange Commission (SEC) rules for failing to conduct an adequate cost-benefit analysis. This string of cases culminated on July 11, 2011 when the D.C. Circuit overturned the SEC’s new proxy access rule. Strict judicial scrutiny of SEC cost-benefit analysis aggravates the strain on SEC resources, already stretched beyond capacity as a result of the influx of new rules required under recent legislation. Furthermore, the standard of judicial review imposed on SEC cost-benefit analysis is inconsistent, which introduces greater uncertainty to the SEC’s rulemaking process and causes the SEC to conduct extensive cost-benefit analyses for all of its rules in order to protect them from invalidation. In light of the massive resource burden associated with conducting a cost-benefit analysis that withstands the judiciary’s critical review, the cost of a comprehensive cost-benefit analysis may outweigh any corresponding efficiency benefits for some rules.

This Note argues that judicial review of SEC cost-benefit analysis must be clearly defined in a way that requires greater deference to the SEC’s empirical findings. A congressional statement establishing the appropriate standard and scope of judicial review of cost-benefit analysis is likely the most effective solution. Judicial constraint is necessary in order to prevent rendering cost-benefit analysis itself an inefficient and overly burdensome exercise.