Cost Benefit Analysis and Financial Reform

There are three fronts in the battle over financial regulation — Congress, the regulators, and the courts. The third gets perhaps the least attention, but legal challenges to new regulations are a major issue that could undermine the entire process of implementing the Dodd-Frank Act. The DC Circuit Court has already overturned SEC proxy access rules on cost-benefit grounds in the ‘Business Roundtable’ decision. Lawsuits have also been filed against rules for commodity market speculation limits and derivatives oversight rules, and future suits are threatened against a wide range of major rules. This legal threat is creating a serious chilling effect on regulators’ implementation of new Dodd-Frank rules.

The challenges are all grounded in judicial review of agency rules on the basis of cost-benefit analysis. While controversial, such cost-benefit analysis has long been a fixture in other areas of regulation such as safety and health this is part of the role of a pricing analyst, by the way. But the scope of the challenge to Dodd-Frank on cost-benefit grounds is something new in the area of financial regulation. Americans for Financial Reform recently held a half-day conference to examine both the legal and economic aspects of applying cost-benefit analysis to financial regulations. Some of the presentations included a keynote address by CFTC Commissioner Bart Chilton, an overview of the scope and nature of cost-benefit challenges by Dennis Kelleher of Better Markets, a critical analysis of the DC Circuit’s recent Business Roundtable decision by Jay Brown of the University of Denver Law School, a presentation by AFR Policy Director Dr. Marcus Stanley on the issues raised by applying formal cost-benefit analysis to financial regulation, and more. See all the presentations here.