The U.S. Securities and Exchange Commission has begun drafting more than 100 rules required by the Dodd-Frank Act with a vacancy atop the office that helps ensure its regulations can withstand court challenges.
The SEC has been without a chief economist since James Overdahl stepped down in March, and two candidates for the job that pays as much as $230,700 a year have fallen through, three people familiar with the matter said. As she presses the search, SEC Chairman Mary Schapiro is seeking recommendations from former agency chief economists and has reversed a decision she made in 2009 that reduced the position’s prestige.
The office of the chief economist, which reviews potential regulations to determine whether benefits outweigh costs, may play a pivotal role as the SEC implements the financial-industry overhaul enacted in July. Much of the SEC’s work must be completed under tight deadlines. Missteps in considering the economic consequences of its rules could leave the agency vulnerable to lawsuits, former SEC officials said.
“The commission is very strong in securities law, strong in accounting, but much weaker in the area of financial analysis,” said Lawrence Harris, a former SEC chief economist who’s now a finance professor at the University of Southern California in Los Angeles. “Writing regulations that will serve the public well, meet the congressional intent and survive legal challenges will require that the commission consult expertise in every discipline, including economics.”
Reporting to Hu
The departures of Overdahl eight months ago and deputy chief economist Stewart Mayhew, who left in August, followed Schapiro’s September 2009 announcement that economists would no longer report to her. Instead they would answer to Henry Hu, a University of Texas law professor hired to run a new unit responsible for spotting emerging threats to financial markets.
Overdahl, in an interview, said the restructuring played a role in his decision to leave. Mayhew declined to comment.
In a letter sent to former chief economists last month, Schapiro said the new hire would “report directly to me.”
“I will be looking to the chief economist to assist me, my fellow commissioners and senior commission staff in evaluating the economic implications of policy options,” she wrote.
Schapiro also assigned one of her legal counsels to monitor work being done by Hu’s division, said the people, who declined to be identified because the decision wasn’t public. Hu announced Nov. 18 he would leave the SEC to return to academia.
“Given the huge volume of Dodd-Frank rulemaking, and the key role that the economists play in the process,” Schapiro “temporarily” assigned one of her senior advisers to assist Hu, SEC spokesman John Nester said. Hu, in an interview, said it was “totally” his decision to step down.
Flawed economic analysis has been a focus of successful efforts to overturn SEC rules in recent years.
Business groups including the U.S. Chamber of Commerce have benefitted from a 1996 revision to securities laws that requires the regulator to consider factors other than investor protection when writing rules. Specifically, the law requires the SEC to evaluate whether its regulations will promote “efficiency, competition and capital formation.”
“No one can possibly predict the costs or burdens with any real precision,” said Donald Langevoort, a former SEC official who teaches securities law at Georgetown University in Washington. “A court wanting to strike down a rule will always be able to say this is inadequate because every cost-benefit analysis is inadequate.”
Since 2005, the U.S. Court of Appeals in Washington has rejected four SEC regulations on the grounds that the agency didn’t adequately justify its actions.
In September, the SEC was hit with its first lawsuit stemming from Dodd-Frank when the Chamber of Commerce sued to overturn a rule that makes it easier for investors to oust directors at public companies.
The legislation gave the SEC authority to approve the regulation on corporate boards. Still, the agency didn’t adequately assess how much money companies may spend fending off dissident board candidates, the chamber argued. The SEC delayed implementation of the rule, known as proxy access, until the litigation is resolved.
Federal agencies must “give careful thought to the consequences of their rules,” Eugene Scalia, a law partner at Gibson Dunn & Crutcher LLP who represents the chamber, said in an interview. “An agency that fails to do that risks finding itself on the losing end of a legal challenge.”
The SEC’s proxy-access rules are “lawful and in the best interests of the public and shareholders,” Nester said.
Dodd-Frank may insulate agencies including the SEC from litigation because it requires that regulators approve certain rules, Langevoort said. In previous cases, judges rejected rules -- such as a requirement that mutual funds appoint independent chairmen -- that the agency had approved without clear guidance from Congress, he said.
“With respect to Dodd-Frank, Congress has been pretty clear about what it wants,” Langevoort said. “I would find it troubling for the court to reject regulations in a situation where lawmakers very plainly directed an agency to carry out its statutory intent.”
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