SEC Rules, Stakeholder Interests, and Cost-Benefit Analysis

Abstract

Rules designed to regulate capital markets and protect investors often have spillover effects, either negative or positive, on stakeholders other than investors. These stakeholders can include managers, employees, consumers, taxpayers, gatekeepers, vendors, and others. This raises a question as to whether cost-benefit analyses of such investor protection rules -- to the extent that the regulator is expected to conduct them -- should take account of these spillover effects. One dilemma is that a rule may potentially be net beneficial to investors while net costly to society at large, or alternatively, it may be net beneficial to society at large but net costly to investors. An examination of several SEC rules indeed suggests that this type of discrepancy can indeed arise routinely. Therefore, current calls in the U.S. to have the SEC conduct more rigorous cost-benefit analyses of its rules should be preceded by a more candid discussion as to the appropriate criterion for determining the efficiency of SEC rules.