September was a big month for economic analysis by financial regulators. On September 19, 2013, the Financial Industry Regulatory Authority--a quasi-governmental regulatory organization--issued a statement on "economic impact assessment for proposed rulemaking." A week later, the Municipal Securities Rulemaking Board--another quasi-governmental regulator--announced that it had adopted a "policy for integrating economic analysis in rulemaking process." These announcements are important because, to date, neither regulator has made systematic use of economic analysis in its rulemaking.
FINRA, which is the front-line regulator for securities firms, has pledged to ask a series of questions in connection with "significant" proposed rules. Specifically, it will try to identify the reason for taking regulatory action, the objective of the proposal, the baseline against which to measure the effects of the proposed regulation, how the proposed rule will work, reasonable alternatives to the proposal, and the economic impacts of the different options. The MSRB, which is the front-line regulator for the municipal securities markets, will take a similar, although not identical, approach. Both approaches are broadly modeled on the staff guidance now used by the Securities and Exchange Commission in its rulemakings. The SEC, in turn, relies--albeit with some modifications--on the guidelines that govern economic analysis by executive branch agencies.
Judging from the SEC's experience, embracing economic analysis can be a slow, difficult, and uncomfortable process. Nevertheless, the fact that these two quasi-governmental regulators have taken a step towards employing this common-sense tool in their rulemaking is positive. It will enable the SEC to conduct its approval process for FINRA and MSRB rules in a manner that is consistent with the SEC's legal responsibility to consider the effect of rules on efficiency, competition, and capital formation. Other financial regulators should follow the lead of the SEC, FINRA, and the MSRB and formally incorporate economic analysis into their rulemaking.