Washington INsider

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Mark Schoeff Jr. looks at what's really happening on Capitol Hill - and the upshot for advisers.

Cost-benefit analysis cuts both ways

Fiduciary advocates join industry in saying SEC falls short

Oct 12, 2012 @ 2:51 pm

By Mark Schoeff Jr.

Barbara Roper, director of investor protection at the Consumer Federation of America, criticized the SEC this week for insufficient cost-benefit analysis in its proposed rule on private-placement advertising.
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Barbara Roper, director of investor protection at the Consumer Federation of America, criticized the SEC this week for insufficient cost-benefit analysis in its proposed rule on private-placement advertising.

Ever since the Dodd-Frank financial reform law was enacted, Capitol Hill Republicans and the financial industry have insisted that the Securities and Exchange Commission and other regulators carefully measure for the potential impact of new rules on the markets.

They argue that cost-benefit analysis leads to better and more efficient oversight that won't smother business with regulatory costs and stifle job creation.

Investor and consumer advocates say that reasonable regulatory impact calculations are necessary but that the industry often pushes for unattainable rigor in order to slow down or kill new rules. In the highest profile case, the Chamber of Commerce and other groups last summer successfully sued to stop an SEC rule on proxy access.

In the latest example of the trend, the American Petroleum Institute and other groups filed a suit this week against the SEC over a Dodd-Frank rule that would require more transparency from oil and gas companies about the payments they make to foreign governments.

“The SEC disregarded its clear legal obligations to limit the costs and anti-competitive harm of the rule,” API stated in a news release.

Industry was not alone in traveling the cost-benefit-analysis highway this week. Fiduciary advocates demonstrated that it is a two-way street.

On Tuesday, state regulators and consumer groups urged the SEC to scrap a proposed rule that would allow private-placement advertising . One of the reasons, they said, is because it lacked sufficient cost-benefit analysis.

It clearly pained Barbara Roper, director of investor protection at the Consumer Federation of America, to contemplate filing a suit against the SEC over the advertising rule, which she says makes investors vulnerable to slick sales pitches for opaque and volatile investments.

“It's an option we can't take off the table at this time,” Ms. Roper told reporters on a Tuesday conference call. “It's hard to imagine a more slam-dunk case.”

Weak cost-benefit analysis also was cited by critics of an SEC proposal this week to extend for two more years a rule that allows investment advisers who are dually registered as brokers to engage in principal trading.

Selling an advisory client stocks and bonds from a firm's own inventory is prohibited under Investment Advisers Act of 1940. But the SEC has kept the principal-trading regulation on the books as an interim rule since 2007 – and wants to extend it to 2014 while it determines whether to implement a uniform fiduciary-duty rule.

There is a cost-benefit section included in the proposed rule. The SEC states: “We believe the principal benefit of the rule…is that it maintains investor choice and protects the interests of investors.”

The SEC's conclusion does not satisfy Duane Thompson, senior policy analyst at Fi360. In his view, the potential harm to investors from principal trading is clear.

He said the agency glossed over the benefits that it asserts exist. For instance, the proposal does not compare returns from principal trading to returns from other investments.

“We don't see in quantitative terms what the benefits are to investors,” Mr. Thompson said. He criticized “selective cost-benefit analysis” by the agency.

This week, cost-benefit analysis became a bigger headache for the SEC because it's now getting hit from both sides.

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