Volume 97 - No. 1 Minnesota Law Review

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

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.


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