Notice & Comment

Beermann on Ahdieh on Cost-Benefit Analysis in Financial Regulation (AdLaw Bridge Series)

Over at the Journal of Things We Like (Lots) — aka Jotwell, the value of which I explain further here —  Jack Beermann has a great review of one of my favorite articles on cost-benefit analysis in financial regulation: Robert Ahdieh‘s Reanalyzing Cost-Benefit Analysis: Toward a Framework of Functions(s) and Form(s), which was published in the NYU Law Review.

Here’s a summary of the article, from the abstract:

The analysis herein arises from the collision course between the sweeping reforms mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and a single sentence of the U.S. Code, adopted nearly fifteen years earlier and largely forgotten ever since. Few were likely thinking of Section 106 of the National Securities Market Improvement Act when the Dodd-Frank Act was enacted on July 21, 2010. As applied by the D.C. Circuit less than a year later in Business Roundtable v. SEC, however, that provision’s peculiar requirement of cost-benefit analysis could prove the new legislation’s undoing.
To help navigate this potential impasse, the Article that follows suggests the need to more carefully analyze the function and form of the cost-benefit analysis mandate in Section 106 and develops a generally applicable framework for doing so. Discussions of cost-benefit analysis have traditionally approached it as a fairly singular phenomenon — with broad aspirations of “efficiency” as its purpose and with its application in environmental and risk regulation understood to capture its form. In reality, cost-benefit analysis is both more ad hoc — and more systematically varied — than this account suggests.
The framework proposed herein thus makes an important contribution to our understanding of the complexities and varieties of cost-benefit analysis generally. In the particular case of Section 106, meanwhile, it counsels a distinct function and particular characteristics of form that will better direct its application — both to the myriad regulations mandated by the Dodd-Frank Act and beyond. Properly understood, Section 106 is designed to encourage SEC attention to substantive considerations that might otherwise be neglected, given the Commission’s traditional focus on investor protection. As to form, Section 106 constitutes a true mandate and one properly subject to judicial review. Contrary to the analysis in Business Roundtable, however, that mandate is procedural rather than substantive in nature. By comparison with formal cost-benefit analysis, it is less rigidly quantitative. It does, however, demand careful attention to the distributional impacts of relevant rulemaking. To such particularized ends and in such tailored form, ultimately, cost-benefit analysis has the potential to generate significant insight — both under Section 106 and for financial regulation as a whole.

And here’s a taste of Professor Beermann’s glowing review, the entirety of which can be found here:

So, what’s so great about Ahdieh’s article? Many things. I’ll list a few of them. First, Ahdieh takes a fresh look at the development and application of cost-benefit analysis in American administrative law, with excellent analysis and biting critique along the way. Second, Ahdieh conducts an extended, in-depth analysis of the enactment, text, and application of Section 106. This is a first-rate case study of a regulatory statute, worthy of inclusion in a course on Legislation or Securities Regulation. Third, Ahdieh explores the values advanced by cost-benefit analysis including enhancing efficiency, reducing cognitive bias, forcing rational priority setting, reducing regulation, and increasing transparency through clearer analysis and enhanced monitoring of agencies. Fourth, Ahdieh explores different forms of cost-benefit type analysis based on the unique language of each regulatory statute imposing analytical requirements. He persuasively argues that Section 106 is best understood as imposing a purely procedural obligation, similar, I guess, to the National Environmental Policy Act’s (NEPA) requirement that agencies “consider” the environmental effects of their actions.

In my view, this discussion contains a devastating critique of the Business Roundtable decision which Ahdieh, in his typically modest and even-handed style, soft-peddles a bit too much for my tastes. Ahdieh’s conclusion is that “[j]udicial review under Section 106 should be circumspect . . . and highly deferential. Such deference is consistent with the traditionally limited judicial constraints on the SEC . . . [and] is in line with the Commission’s significant expertise and its stature as an independent agency.” No kidding. This critique could be applied across a wide swath of the D.C. Circuit’s administrative law decisions.

Since the D.C. Circuit decided Business Roundtable, there has been so much written about cost-benefit analysis in financial regulation, many of which is really terrific. Some of my favorites include Rational Boundaries for SEC Cost-Benefit Analysis by Bruce Kraus and Connor Raso, which was published in the Yale Journal on Regulation, and Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications by John Coates, which is forthcoming in the Yale Law Journal. And of coursethe terrific response to Professor Coates’ article by Eric Posner and Glen Weyl.

Early in these debates, Paul Rose and I authored a report for the U.S. Chamber of Commerce (available here), in which we detailed the importance of cost-benefit analysis in financial regulation. Like pretty much everyone else who has weighed in on Business Roundtable, we conclude that the D.C. Circuit went too far in its judicial review of the SEC’s economic analysis,* though we are more apologetic than most (at 33):

[T]he D.C. Circuit’s more-searching inquiry in Business Roundtable must be placed within its proper context — one in which the SEC had failed for years to take seriously its statutory obligation to consider the costs and benefits of its proposed regulatory actions. Indeed, six years had passed between Chamber of Commerce and Business Roundtable, and one cannot read Business Roundtable without sensing the court’s frustration with the SEC’s continued failure to listen to the court’s admonitions to conduct proper cost-benefit analysis. In particular, the D.C. Circuit in Business Roundtable noted at the outset of its analysis that it was going to vacate the rule as arbitrary and capricious “for having failed once again — as it did most recently in American Equity Investment . . . and before that in Chamber of Commerce — adequately to assess the economic effects of a new rule.”

Moreover, we outline a number of proper grounds from the D.C. Circuit’s precedent for setting aside the SEC’s rule based on errors in economic analysis (at 33):

  1. Failure to consider certain costs—quantitatively or qualitatively—based on the rationale that the costs are difficult to quantify (Chamber of Commerce);
  2. Failure to provide a reasoned basis for rejecting a nonfrivolous alternative to the proposed rule (Chamber of Commerce);
  3. Failure to provide a reasoned basis for the agency’s consideration of a factor set forth by Congress in the agency’s organic statute (American Equity Investment);
  4. Failure to attempt to define the baseline as a comparison to the proposed rule as well as its alternatives (American Equity Investment); and
  5. Failure to take into account the benefits of the status quo yet take into account the costs of the status quo (Business Roundtable).

Although we don’t make the point in the report, these grounds for setting aside an agency’s rule seem much more procedural than substantive, and thus more in line with Professor Ahdieh’s recommended procedural review standard (though they probably assume more quantitative analysis than he would embrace).

In all events, I fully agree with Professor Beermann’s bottom line: “Ahdieh’s article was a joy to read and contains lessons that transcend its context. Anyone interested in cost-benefit analysis, securities regulation, judicial review, statutory construction and the regulatory process will benefit from the time spent reading this article. It’s the type of article that gives administrative law scholarship a good name.”

* Disclaimer: The Chamber was a named party in the Business Roundtable litigation, joining Business Roundtable in challenging the SEC’s rule at issue. Our report was commissioned by the Chamber, but it is an independent report and does not necessarily represent the Chamber’s views on cost-benefit analysis in financial regulation or on the D.C. Circuit’s decision in Business Roundtable.


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