Economic Analysis in Securities Enforcement: The Next Frontier at the SEC

ABSTRACT:

The Securities and Exchange Commission (SEC) has undergone measured change in the last fifteen years in the way it executes its mission to protect investors. Since reforms adopted in 1996, the SEC has operated under a new mandate to consider the effect of new rules on efficiency, competition, and capital formation. That new guiding legal principle, accompanying pressure from courts, and oversight from Congress have spurred measured reforms at the SEC and have begun to change the structure and culture of the agency with respect to its rulemaking process.

That process reform effort has been supported by a preliminary investment in a small group of new economists at the SEC, housed in the new Division of Economic and Risk Analysis (DERA). This Article argues that these developments are incomplete unless the SEC’s economic analysis capability is similarly used to apply robust scrutiny to the SEC’s enforcement process as well. This Article draws on lessons from the FTC’s successful application of economic analysis to its enforcement process in order to develop practical reforms for the SEC.