Republicans again have it all wrong on the substance and politics as they bring to the House floor the SEC Regulatory Accountability Act, or the so-called SEC "cost-benefit" bill. Despite the innocuous name of the bill, Americans should not be fooled. The bill seeks to not only undo Dodd-Frank, but all financial market regulation past, present, and future. It is a bad bill for American taxpayers and for free market capitalism.
By requiring an overly stringent and arbitrary accounting of "costs" to industry, the bill makes it impossible to properly regulate markets. It seeks to eviscerate the mission of the Securities and Exchange Commission (SEC) to protect investors and would functionally subordinate all government oversight and regulation, including by the elected Congress, to industry interests. The bill functions as a one-way ratchet to make deregulation an irresistible gravity, while making regulation of even the worst industry practices a nearly impossible hurdle.
The circumstances of the financial crisis have utterly discredited the Ayn Rand-inspired deregulatory zeal that the proponents of this bill insist on advancing. It is a model that does not work and that led to economic calamity and pain. Instead, the supporters of this bill are hoping that rhetoric can mask reality.
Securities law already directs the SEC "to consider" the cost-benefit of rulemakings. President Obama also directs the SEC to conduct cost-benefit analysis of rulemakings. I support the cost-benefit analysis mandates already contained in federal securities law and President Obama's executive order. So what does the SEC Regulatory Accountability Act add? As former SEC Chairman Arthur Levitt explains in the New York Times, the bill subjects the SEC to an impossibly subjective review of all regulations. This bill was transparently designed to allow each regulation to be challenged in court by industry, but not by consumer advocates.
The primary mission of the SEC is investor protection. The bill undermines that mission by permitting industry to sue the government in order to overturn regulations. Even when Congress passes laws to protect investors, like Dodd-Frank, the SEC would be constrained in issuing rules under this bill by the mandate to prioritize even tertiary costs to industry over investor protection, or any other priority Congress sets, such as constraints on systemic risks. In other words, it creates a government for industry over the People.
The bill is clearly bad for consumer protection and taxpayers as it ushers in a new world where Wall Street functionally decides the rules, and it is caveat emptor for financial services end-users. However, it is not even good for industry in the broader sense. It would mean that rulemakings would take even longer, as the SEC struggled to meet the impossibly subjective economic cost-benefit standard to stave off the coming court battle over competing economic impact projections. The ink would not be dry on a SEC rule before the race to the courthouse door to challenge the regulations would begin. Presumably, the most powerful industry participants would challenge the rules in the way that achieves their narrow interest, which may be to the detriment of investors or other less-affluent market participants. In this way, the most powerful industry interests would be able to not only use the courts to undo consumer protections, but to also seek competitive advantage over competitors.
In Congress, I hear a lot from the financial industry about "uncertainty." There would never be certainty in securities markets if this bill were to ever become law. However, my primary concern is not for industry. It is for the People. The bill would eventually degrade consumer protection in financial markets until no investor could have faith in U.S. financial markets. The bill would allow firms and markets to operate unchecked. The industry with the best lawyers would reign, regardless of business model, practices, or any other market consideration. Congress would be powerless to help. This legislation rejects the lessons of the financial crisis and statutorily mandates the mistakes that led to it, with the taxpayers on the hook.