Incorporating Market Reactions Into SEC Rulemaking

The Essay proposes a novel mechanism by which the U.S. Securities and Exchange Commission (SEC) can engage in a more empirically informed rulemaking from an ex ante perspective. When the SEC seeks to adopt a rule for which reliable data on point is lacking and there are strong opposing views on the rule’s likely effects, it should direct its staff economists from the Division of Economic and Risk Analysis examine stock market reactions to any intervening events that present surprise elements for the rule. In some cases, such events may arise without any act on the part of the agency — for example, as a result of certain unforeseen acts of Congress. In other cases, they may arise from the agency’s carefully planned rule-related announcements or previously unannounced changes in the scope of the rule. The SEC economists’ event study should then constitute the default starting point of discussion for the regulatory dialogues that take place during the comment period, and the ensuing discussion should inform the agency’s decision whether to adopt the rule as well as it final cost-benefit analysis. In this manner, the agency would have necessary empirical data on point as well as critical assessments of the study to guide its rule adoption decision. In advancing this proposal, this Essay relies the recently developed literature in finance that analyzes the “feedback effects” of financial markets. This Essay concludes by discussing specific issues for the agency to consider in implementing the proposal.