The Efficiency Criterion for Securities Regulation: Investor Welfare or Total Surplus?

Recent regulatory debates among legislators and legal scholars have centered on whether independent agencies should be subjected to a more rigorous cost–benefit analysis requirement than their current mandates, or alternatively, whether they should be required to conduct cost–benefit analyses that conform to the Office of Management and Budget’s guidance under Circular A-4, as many executive agencies already do. This Article closely examines the way in which one particular agency–the Securities and Exchange Commission–conducts its economic analysis in rulemaking. The SEC’s economic analysis, conducted pursuant to a statutory mandate to consider the effects on “efficiency, competition, and capital formation,” is essentially an investor welfare analysis: it considers how the rule would benefit investors and then considers the out-of-pocket compliance costs that regulated entities would incur. Circular A-4, by contrast, recommends a total surplus approach: a rule’s benefits and costs are considered from the perspective of all stakeholders in the affected sectors, without directly incorporating distributional effects. The current debates therefore raise an urgent policy question for the SEC with regard to the proper criterion of efficiency for its rules: whether it should continue to consider the costs and benefits of its rules from the perspective of investors only, or whether it should instead consider them from the perspective of total surplus. This Article raises four points in considering this question. First, because the two approaches provide conflicting standards as to the efficiency determination, arguments to impose additional burdens on the economic analysis for SEC rules are unlikely to be constructive unless parties can first agree upon the relevant efficiency criterion for securities regulation. The efficiency-criterion question must therefore be considered prior to the procedural question. Second, because Circular A-4 considers a broader spectrum of costs and benefits, those concerned exclusively with investors’ economic welfare should have reasons to object to, rather than support, its application to SEC rules. Third, despite such reasons, there is nevertheless a case for preferring Circular A-4’s approach because, if used properly, it offers several important benefits from a broader policy perspective. Finally, because the SEC has broad rulemaking authority and is not in fact constrained by an obligation to justify all of its rules on efficiency grounds, if the SEC seeks to protect investors’ economic interests at the expense of other stakeholders, it should be both more transparent and aggressive in adopting such rules for non-efficiency purposes that would qualify as “compelling public needs.”