Application Of Cost-benefit Analysis In U.S. Securities Legislation And Its Reference

After the release of “Implementing Outlines of Promoting Administration inAccordance with the Law in a Comprehensive Way” in2004, which requiredcost-benefit analysis in government legislation programs, especially economiclegislation programs, several local governments released documents to carry out therequirements of the “Implementing Outline” and some local governments (such asthat of Hainan province) released detailed opinion on the implementation.Cost-benefit analysis therefore gradually was known to the public. However, due tothe complexity and difficulties of data collection and other expertise, cost-benefitanalysis has not yet played a leading role in the securities legislation (even financialor economic legislation) process, no matter prior to legislation or in post-legislationassessment.As to the U.S., Cost-benefit analysis has been a procedure that most of Americanregulatory bodies must go through when stipulating regulations. This requires that theregulations cannot be passed until the regulations’ benefits have been proved tooutweigh their costs. Securities and Exchange Commission (SEC) has taken thecost-benefit analysis of rulemakings into consideration since1980s. In thisbackground, the dissertation researches into the cost-benefit analysis taken in the U.S.securities legislation, and puts forward several pieces of suggestions for thecost-benefit analysis in Chinese securities legislation. Besides the introductory part, the dissertation composes of6chapters.Chapter1is the theoretical foundations of cost-benefit analysis. The definition,premises and functions and implementing possibility of cost-benefit analysis arediscussed. Firstly, the legislation mentioned in this dissertation refers to legislation ina broad sense, including the whole process from establishing to implementing the law.From the perspective of law and economics, good law is viewed as a scarcesocial resource, and the desire to save the cost compels legislators to make prudentchoice among various plans. Government, as a reasonable person, has a tendency tochoose the plan that maximizes its own benefits. Cost-benefit analysis makes thedecision-making of the legislators transparent, and help the legislators make theoptimal choice that allocate the resources to the best extent and maximize the socialwelfare.It’s possible to apply the economic approach into the legislation theory andpractice. Fairness is the target of efficiency. The practice of considering whether theintended benefits outweigh the cost ensures the implementation of the purpose offairness in legislation.Chapter2discusses the statutory basis of cost-benefit analysis in commonlegislation and securities legislation respectively and how they are currently applied.The Executive Orders released by several presidents make up the foundations ofcarrying out cost-benefit analysis in legislation. The executive agency implement thecost-benefit analysis to verify the need of establishing the regulations and the reportwas circulated to the president, the Congress and Office of Management and Budgetfor review. SEC is not legally bound by the executive orders and has no legal duty tocarry out cost-benefit analysis, but with the implementation of Dodd-Frank Act,SEC’s quality of legislation has become the focus of people’s attention. SEC lost in3cases since2005, and the court decided that two rules established by the SEC beinvalidated, the reason of which is inadequate cost-benefit analysis. To cope with thechallenge, the SEC established the “the Current Guidance on Economic Analysis inSEC Rulemakings”.Chapter3lists the substantive elements in carrying out the cost-benefit analysis in securities legislation, namely, identifying the objectives of the rulemakings,defining the economic baseline, listing regulatory alternatives, and finally specifyingthe costs and benefits of the proposed rule and alternatives. The impact of therulemakings on efficiency, competition and capital formation, and small entitiesshould also be discussed.In the above-mentioned elements, the last point is the key to cost-benefit analysisin legislation. It includes identifying the potential cost and benefits, quantifying thecost and benefit as much as possible, realizing and discussing the uncertainties of theexpected cost and benefits and discussing the influence of the uncertainties andexplaining why it cannot be quantified.The writer uses the economic analysis in the rule of “Registration of MunicipalAdvisors” to illustrate the application of the substantive elements to the specific rule.Chapter4introduces how different divisions and offices cooperate to develop theproposed rule and its economic analysis in pre-proposed, proposing, andpost-proposed stages. Usually the legislation process includes asking for the advicefrom the public, the review and passing of the rules and the release of the rules.Economists should participate in the cost-benefit analysis in the early stage.Chapter5discusses the gains and losses of the U.S. practice of cost-benefitanalysis in securities legislation. The SEC has taken several measures to improve thequality of cost-benefit analysis. For example, the SEC released “the CurrentGuidance on Economic Analysis in SEC Rulemakings”, make staff from differentdepartments in the SEC cooperate with each other, hire more economists andprofessionals to take on cost-benefit analysis, and SEC is always supervised by theCongress, the court and the public. The5commissioners in the SEC make thedecisions together to establish the public financial policies better. The dissertation alsocompares the different practices in other jurisdictions like the UK and Ontario,CanadaThe last chapter, Chapter6is about the current application of cost-benefitanalysis in Chinese ordinary legislation and securities or financial legislation, andpieces of suggestions on a better practice of cost-benefit analysis. The present legislation framework in China shows that cost-benefit analysis is not widely appliedin our country. There are problems of regulators’ not paying enough attention tocost-benefit analysis, the act of economic executive legislation being not able to besued and focusing on qualitative analysis, etc.After analyzing the present situation and problems of cost-benefit analysis in thefield of securities legislation, this chapter puts forward several pieces of suggestions,which includes paying more attention to cost-benefit analysis, make certain thesubject and targets of the analysis, establishing guidance for cost-benefit analysis, andimprove the supervision system in government legislation. Also, the chapter discussesthe timing of the cost-benefit analysis, the notice-and-comment process and how tomake sure the rational boundaries of the cost-benefit analysis.At the end of the dissertation, the writer tries to explain how we can apply thesubstantive elements in the “the Current Guidance on Economic Analysis in SECRulemakings” to the practice of cost-benefit analysis in broadening the definition of“securities” in China.Generally speaking, cost-benefit analysis is a process to help the policy-makersmake the optimal choice and maximizes the social benefits. But we should also seethat the cost-benefit analysis has its own limitations like being hard to quantify andmay be manipulated by the interest-groups etc. While we are learning from the U.S.practices, we should make endeavors that apply to the Chinese situation and pay moreattention to the boundaries of cost-benefit analysis. What’s more, due to thelimitations of the writer’s education background, the quantification of the analysis inthis dissertation is not enough and further research will be carried out in the future.