Risk & Compliance

Glassman: SEC Needs Lesson in Economics

SEC rules often lack "rigorous thinking and empirical support," says outgoing commissioner Cynthia Glassman.
Helen ShawJuly 7, 2006

Cynthia Glassman, a Republican Securities and Exchange commissioner who was appointed in 2002 and will not seek a second term, called for economically sound regulation in a speech before the National Economists Club in Washington, D.C., on Thursday. Glassman, whose term expired in June, will continue at the commission until she is replaced.

As an economist among lawyers at the SEC, Glassman emphasized the need for more economic and cost-benefit analysis in rulemaking and enforcement projects during her tenure, she noted. “It is a constant struggle, however, to keep economic analysis from being used to justify a preconceived result,” stated Glassman, “rather than to find out the economic implications of a rule or rule proposal before a decision is made regarding whether and what to propose.”

Glassman provided examples of SEC attempts at regulation that have been turned down by courts. She recalled that when the commission proposed requiring that mutual funds have at least 75 percent independent directors and an independent chair, she requested evidence on the performance of funds with inside chairs compared with funds with independent chairs. However, the empirical evidence “did not materialize” and she dissented from the adoption of the rule. Since then, the U.S. Chamber of Commerce challenged the rule and required the SEC “to do the empirical homework,” and the commission has republished the proposal for comment.

The hedge-fund adviser registration requirement is another instance of rulemaking characterized by “lack of rigorous thinking and empirical support,” Glassman stated. A nonanalytical study of the hedge-fund industry was used to justify the need for the registration requirement, according to Glassman, who believed there was a need for a rigorous study. The D.C. Circuit struck down the hedge-fund rule just three weeks ago.

Glassman expressed disappointment that the commission “wasted so much time and effort” on those particular rules. She would have preferred that the agency instead focus on such issues as auditor concentration in the accounting industry, the ways that different regulatory systems for broker-dealers and investment advisers affect investors, and global exchange regulation.

In conclusion, Glassman said that her free-market philosophy has been confirmed by her experience at the commission, and urged the SEC to establish rules based on empirical evidence. Her last recommendation was to speed the timeliness of SEC processes, from rulemaking, enforcement, examinations, and inspections. “We need to find ways to speed things up,” she said.

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