Implementation of the Current 

Guidance on Economic Analysis in 

SEC Rulemakings

 June 6, 2013

Report No. 516

We appreciate the courtesy and cooperation that you and your staff extended to 

our staff during this audit.

Attachment

cc: Erica Y. Williams, Deputy Chief of Staff, Office of the Chair

Elisse B. Walter, Commissioner

Luis A. Aguilar, Commissioner

Troy A. Paredes, Commissioner

Daniel M. Gallagher, Commissioner

Craig Lewis, Director and Chief Economist, Division of Risk, 

 Strategy, and Financial Innovation

Anne K. Small, General Counsel, Office of the General Counsel 

John Ramsay, Acting Director, Division of Trading and Markets

Lona Nallengara, Acting Director, Division of Corporation Finance

Norman Champ, Director, Division of Investment Management

Jeff Heslop, Chief Operating Officer, Office of Chief of Operations

Lacey M. Dingman, Director, Office of Human Resources

Michael A. Conley, Deputy General Counsel, Office of the General

 Counsel

Kathleen Hanley, Deputy Director and Deputy Chief Economist, Division of 

 Risk, Strategy and Financial Innovation

Jennifer Marietta-Westberg, Deputy Director and Deputy Chief Economist,

 Division of Risk, Strategy and Financial Innovation

James R. Burns, Deputy Director, Division of Trading and Markets

Paula Dubberly, Deputy Director, Office of Policy and Capital Markets,

 Division of Corporation Finance 

Douglas Scheidt, Chief Counsel, Division of Investment Management
Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page i

Implementation of the Current Guidance on 

Economic Analysis in SEC Rulemakings

Executive Summary

Background. On July 24, 2012, the U.S. Securities and Exchange 

Commission’s (SEC or Commission) Office of Inspector General (OIG) received 

a letter from the Chairman of the U.S. House of Representatives Committee on 

Oversight and Government Reform (House Oversight Committee) and the 

Chairman of the U.S. House of Representative’s Subcommittee on TARP 

(Troubled Assets Relief Program), Financial Services and Bailouts of Public and 

Private Programs (Subcommittee on TARP) requesting that the OIG evaluate the 

SEC’s implementation of the Current Guidance on Economic Analysis in SEC 

Rulemakings (Current Guidance), issued on March 16, 2012. The letter

requested that we assess and report on the degree to which the SEC has

incorporated the principles and policies of the Current Guidance into economic 

analyses supporting proposed and final Commission rules. The OIG was also 

asked to evaluate the degree to which the SEC has ensured that the principles 

and policies of the Current Guidance have been incorporated into the economic 

analyses of rulemakings of the Financial Industry Regulatory Authority, other selfregulatory organizations under the Commission's jurisdiction, and the Public 

Company Accounting Oversight Board.

The Current Guidance, dated March 16, 2012, is an internal memorandum that

the Division of Risk, Strategy, and Financial Innovation (RSFI) and the Office of 

the General Counsel (OGC) developed. RSFI and OGC sent the memorandum 

by email to SEC staff in the rulewriting divisions and offices on that same date. 

The Current Guidance is based on and references recent court decisions, reports 

from the SEC OIG and the Government Accountability Office (GAO), and 

Congressional inquiries that have raised questions about or recommended 

improvements (or both) to the Commission’s economic analysis in rulemaking. 

The Current Guidance, in Sections A and B, contains four substantive 

requirements and one process requirement.

The SEC derives its rulemaking authority from Federal securities laws. The 

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 

and the Jumpstart Our Business Startups Act gave the SEC additional 

rulemaking authority and required the SEC to adopt specific rules. Rulemaking 

at the SEC has three stages: pre-proposal stage, proposal stage, and adopting 

stage.
Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page ii

Congressional Request. On December 21, 2012, the Interim Inspector General 

sent letters to the Chairman of the House Oversight Committee and the 

Chairman of the Subcommittee on TARP outlining the OIG’s approach for 

responding to their request. The OIG’s letters stated that it would:

• conduct “an audit to confirm that procedures have been 

established and are being used in accordance with the Current 

Guidance and that the Current Guidance incorporates 

recommendations offered by others on rulemaking [Phase 1];” and 

• direct “an experienced contractor with expertise in economic 

analysis, the securities industry, and SEC operations to perform 

the more extensive rulemaking analyses [Phase 2].” 

This audit report covers Phase 1 of the OIG’s response to the Congressional 

request.

Objectives. The objectives of the audit were to determine whether:

• the SEC has established and implemented procedures for a 

methodical economic analysis process in accordance with its 

Current Guidance;

• the SEC developed and uses procedures to improve the 

economic analysis process such as hiring additional economists 

and implementing a systematic review process; and

• the Current Guidance incorporates the SEC OIG’s and other 

commenters’ recommendations issued to the SEC on economic 

analysis.

Results. The OIG found that the Commission has used the Current Guidance

since its issuance in March 2012 to develop the economic analyses for 

rulemakings. However, the SEC has not issued written operating procedures 

implementing the Current Guidance. Not having documented operating 

procedures poses a risk that the SEC may inconsistently apply the Current 

Guidance’s requirements throughout the rulemaking process.

Further, the OIG found that the Commission has taken steps to improve its

process for economic analysis by: (1) requiring RSFI economists to be involved 

in the three stages of the rulemaking process; (2) hiring economists with financial 

industry knowledge; and (3) formalizing the Chief Economist’s review and 

concurrence process.

Finally, we found that the Commission incorporated recommendations it received 

from the SEC OIG and other commenters into its Current Guidance. Specifically, 
Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

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the SEC addressed in the Current Guidance: (1) recommendations from the SEC 

OIG followup review of Dodd-Frank rulemaking; (2) a GAO report on Dodd-Frank 

rulemaking; and (3) a U.S. Court of Appeals opinion that vacated an SEC rule

about proxy access.

Summary of Recommendation. This report contains one recommendation 

designed to ensure that the SEC develops written operating procedures for 

economic analysis to implement the requirements in the Current Guidance.

Management’s Response to the Report’s Recommendation. The OIG 

provided the Chairman’s Office with the formal draft report on May 24, 2013. The 

Chairman’s Office concurred with the recommendation in this report. The OIG 

considers the report recommendation resolved. However, the recommendation 

will remain open until documentation showing the recommendation has been fully 

implemented is provided to the OIG. The Chairman’s Office’s response to the 

recommendation and OIG’s analysis of that response is presented after the

recommendation in the body of this report.
Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page iv

TABLE OF CONTENTS

Executive Summary....................................................................................................... i

Table of Contents ........................................................................................................ iv

Background and Objectives .................................................................................1

Background .......................................................................................................1

Objectives ..........................................................................................................6

Findings and Recommendation ..........................................................................7

Finding 1: The Commission Has Used the Current Guidance in its 

Rulemakings, but Does Not Have Documented Procedures Implementing 

the Current Guidance .......................................................................................7

Recommendation 1 ......................................................................9

Finding 2: The SEC Hired Additional Economists and Formalized the 

Chief Economist’s Concurrence Process for Economic Analysis .......................9

Finding 3: The Current Guidance Includes Recommendations from the 

SEC OIG and Other Commenters....................................................................16

Appendices

Appendix I: Abbreviations................................................................................20

Appendix II: Scope and Methodology..............................................................21

Appendix III: Criteria........................................................................................25

Appendix IV: Recommendation.......................................................................27

Appendix V: Management Comments.............................................................28

Tables

Table 1: RSFI Staffing Levels..........................................................................11

Table 2: Incorporation of SEC OIG Recommendations in the Current 

Guidance .........................................................................................................16

Table 3: Incorporation of U.S. Court of Appeals Opinion in the Current 

Guidance .........................................................................................................18

Table 4: Rules the OIG Reviewed...................................................................23

Figure

Figure 1: The SEC’s Process for Economic Analysis in Rulemakings ..............5
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Report No. 516

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Background and Objectives

Background

Congressional Request

On July 24, 2012, the U.S. Securities and Exchange Commission’s (SEC or 

Commission) Office of Inspector General (OIG) received a letter from the

Chairman of the U.S. House of Representatives Committee on Oversight and 

Government Reform (House Oversight Committee) and the Chairman of the U.S. 

House of Representative’s Subcommittee on TARP (Troubled Assets Relief 

Program), Financial Services and Bailouts of Public and Private Programs 

(Subcommittee on TARP) requesting that the OIG evaluate the SEC’s

implementation of the Current Guidance on Economic Analysis in SEC 

Rulemakings (Current Guidance), issued on March 16, 2012. The letter

requested that we assess and report on the degree to which the SEC has 

incorporated the principles and policies of the Current Guidance into economic 

analyses supporting proposed and final Commission rules. The OIG was also 

asked to evaluate the degree to which the SEC has ensured that the principles 

and policies of the Current Guidance have been incorporated into the economic 

analyses of rulemakings of the Financial Industry Regulatory Authority, other selfregulatory organizations under the Commission's jurisdiction, and the Public 

Company Accounting Oversight Board.

Interim Inspector General’s Response

On December 21, 2012, the Interim Inspector General sent letters to the 

Chairman of the House Oversight Committee and the Chairman of the 

Subcommittee on TARP outlining the OIG’s approach for responding to their 

request. The OIG’s letters1 stated that it would:

• conduct “an audit to confirm that procedures have been 

established and are being used in accordance with the Current 

Guidance and that the Current Guidance incorporates 

recommendations offered by others on rulemaking [Phase 1];” and 

• direct “an experienced contractor with expertise in economic 

analysis, the securities industry, and the SEC operations to 

perform more extensive rulemaking analyses [Phase 2].”

 1

Jon T. Rymer, Interim SEC Inspector General, letters to Darrell Issa, Chairman, House Committee on 

Oversight and Government Reform (December 21, 2012), and to Patrick McHenry, Chairman, House 

Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs (December 21, 

2012). 
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This audit report covers Phase 1 of the OIG’s response to the Congressional 

request.

Current Guidance. The Current Guidance, dated March 16, 2012, is an internal 

memorandum that the Division of Risk, Strategy, and Financial Innovation (RSFI)

and the Office of the General Counsel (OGC) developed. RSFI and OGC sent 

the memorandum by email to SEC staff in the rulewriting divisions and offices on

that same date. The Current Guidance is based on and references recent court 

decisions, reports of the SEC OIG and the Government Accountability Office 

(GAO), and Congressional inquiries that have raised questions about or 

recommended improvements (or both) to the Commission’s economic analysis in 

rulemaking. The Current Guidance, in Sections A and B, contains four 

substantive requirements 2 and one process requirement.

Section A of the Current Guidance discusses four substantive requirements to be 

used when conducting economic analysis in SEC rulemaking. Those 

requirements are to:

1. clearly identify the justification for the proposed rule;

2. define the baseline3 against which to measure the proposed rule’s 

economic impact;

3. identify and discuss reasonable alternatives to the proposed rule; and

4. analyze the economic consequences of the proposed rule and the 

principal regulatory alternatives.

Section B of the Current Guidance covers the process requirement for “enhanced

integration of economic analysis into the rulemaking process and rule releases.”4

Rulemaking at the SEC. The SEC derives its rulemaking authority from Federal 

securities laws.5

 The Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act)

6 and the Jumpstart Our Business Startups Act7 gave the 

 2 SEC, Current Guidance on Economic Analysis in SEC Rulemakings (March 16, 2012), p. 4.

3 The Commission defines a baseline as the best assessment of how the world would look in the absence of 

the proposed action.

4 Id. at p. 15. 

5 These include, among others, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust 

Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act of 1940.

6 Dodd-Frank Wall Street Reform and Consumer Protection Act, July 21, 2010.

7 Jumpstart Our Business Startups Act, April 5, 2012.
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SEC additional rulemaking authority and required the SEC to adopt specific 

rules. Rulemaking at the SEC has three stages:

• Pre-Proposal Stage. This stage involves internal meetings among

the rulewriting divisions, OGC, RSFI, and other SEC divisions and 

offices to begin to consider the scope and terms of a possible

rulemaking and develop a plan of action. The SEC may issue a 

concept release8 if the Commission decides to seek public input 

before releasing a proposed rule.

• Proposing Stage. When approved by the Commission, a proposed 

rule is published for public notice and comment for a specified 

period of time, typically between 30 and 60 days. Proposing 

releases usually contain the text of the proposed new or amended 

rule, a discussion of the issue or problem the proposal is designed 

to address, and a detailed economic analysis. 

• Adopting Stage. When approved by the Commission, a new rule or 

rule amendment becomes part of the official rules that govern the 

securities industry. Adopting releases reflect the SEC’s 

consideration of public comments and generally include a detailed 

economic analysis.9

The rulemaking process begins when the rulewriting division’s staff formulates a 

rulemaking recommendation on the basis of either the Commission’s discretion 

or a Congressional mandate. The rulewriting divisions, which include the 

Division of Corporation Finance (CF), the Division of Investment Management 

(IM), and the Division of Trading and Markets (TM), have the primary 

responsibility for rulemaking. These divisions assign staff to the rulemaking and

reach out to other SEC divisions and offices to ensure that relevant staffs are 

involved. 

The rulewriting division that is responsible for the rulemaking prepares a term

sheet that briefly describes the proposed rule and includes a preliminary 

economic analysis of the proposal that RSFI prepares. By this stage in the 

rulemaking process, RSFI economists have become an integral part of the 

rulemaking teams. The SEC uses a term sheet to facilitate discussion about the 

proposed rule. The term sheet is circulated among the Commissioners for their 

review and input.

 8 A concept release typically outlines the topic of concern, identifies different potential approaches, and 

raises a series of questions inviting public comment on the matter. The Commission considers the public’s 

feedback as it decides which approach, if any, is appropriate.

9 See Rulemaking, How it Works, http://www.sec.gov/answers/rulemaking.htm.
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The responsible rulewriting division drafts a proposing or adopting release 

(depending on the stage of the rulemaking) and coordinates with OGC and RSFI 

representatives about their input to the draft. The rulewriting division and RSFI 

work together to prepare the economic analysis included in the release. At 

various stages during the drafting process, drafts of the release are circulated to

the Commissioners for their review and input. The SEC staff may revise the draft 

rule and the release on the basis of comments from the Commissioners. 

OGC reviews the proposed rulemaking to verify that the SEC has legal authority 

to adopt the rule and the release complies with the Administrative Procedure 

Act10 and other Federal administrative law requirements.11 OGC also looks at 

the entire rule to determine whether it is consistent with applicable laws and other 

requirements. RSFI is responsible for the content of the economic analysis in the 

rulemaking release and the Chief Economist must concur with the economic 

analysis. Once a draft of the proposing or adopting release is completed, the 

responsible rulewriting division formally submits to the Commission, through the 

Office of the Secretary (OS), an action memorandum recommending 

Commission approval and issuance of the release. OS ensures that the rule

complies with the formatting requirements of the Office of the Federal Register

and coordinates the Commissioners’ voting on the rule. If a majority of the 

Commissioners vote to issue the release, it is posted on the SEC’s public 

website and published in the Federal Register. In the case of an adopting 

release, the final rule is also published in the Code of Federal Regulations.

Economic Analysis in the SEC’s Rulemaking Process. The Current 

Guidance specifies that economic analysis at the SEC includes several important 

evaluations and high-level controls such as defining a baseline, quantifying costs 

and benefits where possible, and RSFI Chief Economist concurring with a rule’s 

economic analysis. Figure 1 illustrates the SEC’s process for economic analysis 

in the three rulemaking stages.

 10 The Administrative Procedure Act (APA) of 1946, 5 U.S.C. §§ 501 et. seq., provides procedural standards 

that Federal administrative agencies must follow. With respect to rulemaking, the APA requires agencies to 

give the public advance notice of the contents of a proposed rule and to offer members of the public an 

opportunity to express their views on the proposed rule. 5 U.S.C. § 553. The APA also provides that courts 

may set aside any rule found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in 

accordance with the law.” 5 U.S.C. § 706.

11 These include the Paperwork Reduction Act, the Regulatory Flexibility Act, and the Small Business 

Regulatory Enforcement Fairness Act.
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Figure 1: The SEC’s Process for Economic Analysis in Rulemakings 

Source: OIG generated
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Objectives

The objectives of the audit were to determine whether:

• the SEC has established and implemented procedures for a methodical 

economic analysis process in accordance with its Current Guidance.

• the SEC developed and uses procedures to improve the economic 

analysis process such as hiring additional economists and implementing a 

systematic review process.

• the Current Guidance incorporates the SEC OIG’s and other commenters’ 

recommendations issued to the SEC on economic analysis.
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Findings and Recommendation

Finding 1: The Commission Has Used the Current 

Guidance in its Rulemakings, but Does Not Have

Documented Procedures Implementing the 

Current Guidance

The SEC has used the Current Guidance in its rulemakings, 

but it has not established and implemented written 

procedures for a methodical process for economic analysis 

in accordance with its Current Guidance.

Issuance of and Direction to Use Current Guidance

The SEC issued the Current Guidance in memorandum form on March 16, 2012. 

The Current Guidance, which RSFI and OGC drafted with input from the 

rulewriting divisions, consists of guidelines to use for developing high-quality 

economic analyses that deliver the best available information about a rule’s likely 

economic consequences.

12 In a June 11, 2012, letter to Congress, the former 

SEC Chairman, Mary Schapiro, stated that she had instructed SEC directors in 

the rulewriting divisions and offices to follow the Current Guidance.13 Also, during 

a staff meeting with the rulewriting division’s directors, the former Chairman 

directed them to inform their staff to follow the Current Guidance. Further, RSFI’s

webpage, which is located on the Commission’s public website, states that “[t]he 

Chairman has directed the staff to follow the Guidance in SEC rulemaking.”14 

Current Guidance Practices

We reviewed 9 of 23 rules issued between March 16, 2012, and November 30, 

2012. On the basis of our review, we found that the Commission has used the 

Current Guidance in its rulemaking practice. For example, we found that RSFI 

economists were integral members of the rulewriting team and contributed to the 

three stages of the rulemaking process. Additionally, RSFI economists drafted or 

closely collaborated with the rulewriting divisions to prepare economic analyses in 

SEC rulemakings. 

 12 SEC, Current Guidance on Economic Analysis in SEC Rulemakings (March 16, 2012), p. 2.

13 Letter from the former SEC Chairman, Mary Schapiro, to Chairman Patrick McHenry, Subcommittee on 

TARP (June 11, 2012), p. 2.

14 See http://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.shtml.
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During this audit, we did not analyze the quality and completeness of the 

economic analyses in the rules. However, we evaluated in more detail the

economic analyses in SEC rulemakings in our concurrent review, Use of the

Current Guidance on Economic Analysis in SEC Rulemakings, Report No. 518

(Phase 2).

Lack of Documented Operating Procedures

The SEC has not issued written operating procedures implementing the Current 

Guidance. In particular, TM and RSFI do not have written operating procedures 

for implementing economic analysis. TM and RSFI staffs believe that there may 

be tradeoffs in having documented operating procedures because they may result 

in prescriptive requirements that are not feasible or appropriate for all rules. 

We found that IM has draft written operating procedures and CF has a rulemaking 

checklist, but neither division’s documents have been updated to reflect the 

Current Guidance.

15 Also, we reviewed OGC’s SEC Compliance Handbook

(October 1999)

16 and found that it has not been revised since it was issued and 

therefore does not incorporate the Current Guidance, although OGC staff advised 

us that the Current Guidance is provided as a supplement to requests for the 

Compliance Handbook. 

The Office of Management and Budget (OMB) Circular A-123, Management’s 

Responsibility for Internal Control, requires management to establish and maintain 

internal control to achieve effective and efficient operations, reliable financial 

reporting, and compliance with applicable laws and regulations under five 

standards. One of the standards is control activities, which include “policies, 

procedures and mechanisms in place to help ensure that agency objectives are 

met.”17

Not having documented operating procedures poses a risk that the SEC may 

inconsistently apply the requirements of the Current Guidance throughout the 

rulemaking process. Written policies and procedures assist management in 

ensuring its continuity of operations and help in preventing loss of institutional 

knowledge about the organization’s processes.

Conclusion

The SEC issued the Current Guidance to improve the process for economic 

analysis in rulemakings. Our audit found that the Commission has used the 

 15 CF staff stated that they plan to update its checklist “in the near future.”

16 The Handbook provides guidance on the SEC’s rulemaking process, its process for economic analysis, and 

laws and regulations governing the rulemaking process.

17 OMB Circular A-123, Management’s Responsibility for Internal Control (December 21, 2004), pgs. 7-8.
Implementation of Current Guidance on Economic Analysis June 6, 2013

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Current Guidance in its rulemaking practice. However, we found that the 

rulewriting divisions, RSFI, and OGC do not have written procedures for 

implementing the Current Guidance’s substantive and process requirements. 

Having written operating procedures would help ensure staff in the rulewriting 

divisions, RSFI, and OGC consistently apply the Current Guidance when 

undertaking rulemaking at the SEC.

Recommendation 1:

The Chairman’s Office, in coordination with the Office of the General 

Counsel (OGC) and the Division of Risk, Strategy, and Financial Innovation

(RSFI), should issue–to SEC rulewriting divisions, RSFI, and OGC–written 

operating procedures for economic analysis that implement the Current 

Guidance on Economic Analysis in SEC Rulemakings.

Management Comments. The Chairman’s Office concurred with this 

recommendation. See Appendix V for management’s full comments. 

OIG Analysis. We are pleased the Chairman’s Office concurred with our

recommendation. The OIG considers this recommendation resolved. 

However, this recommendation will remain open until documentation 

showing the recommendation has been fully implemented is provided to 

the OIG.

Finding 2: The SEC Hired Additional Economists 

and Formalized the Chief Economist’s 

Concurrence Process for Economic Analysis

The Commission has taken steps to improve the process for 

economic analysis by requiring the participation of RSFI 

economists in the three stages of the rulemaking process, 

hiring economists with financial industry knowledge, and

formalizing the Chief Economist’s review and concurrence 

process.

Overview

During our audit, we found that the SEC has taken certain actions to improve its 

process for economic analysis. These actions include requiring RSFI’s 

involvement throughout the rulemaking stages, hiring economists with financial 

industry knowledge for rulemaking, and formalizing the Chief Economist’s process 

for concurring with economic analyses. The Commission established RSFI as a 

division in September 2009. Three RSFI offices facilitate the division’s 

collaboration with the SEC’s rulewriting divisions. An assistant director, who is an 
Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page 10

economist, leads each of the offices that is involved in rulemakings. Those offices 

are the Office of Corporate Finance, Office of Markets, and Office of Investments 

and Intermediaries.

RSFI has established designated points-of-contact for each rulemaking division. 

For economic analysis, the Office of Corporate Finance supports CF; the Office of

Markets supports TM’s Office of Market Supervision; and the Office of 

Investments and Intermediaries supports IM and other offices in TM. 

When a rulemaking is initiated, the rulewriting division generally contacts the RSFI 

assistant director who supports the relevant division. The assistant director 

assigns one or more economists to work with the rulewriting divisions on the rule. 

RSFI’s Involvement in the Process for Economic Analysis 

To assess whether RSFI economists were involved in the economic analysis

process, OIG reviewed:

• emails between rulewriting divisions and RSFI;

• comments RSFI made on draft economic analyses and term 

sheets; and

• internal memoranda that RSFI prepared for rules. 

In addition, we interviewed staff in the rulewriting divisions and RSFI to discuss 

their coordination process and verified RSFI’s involvement throughout the 

rulemaking process. RSFI staff asserted that they often conduct initial research

on a rule and review existing studies or data that could be helpful to a particular 

rule. RSFI also attempts to replicate or improve data or findings in studies 

pertaining to each specific rule.

Overall, we found that RSFI coordinates with rulewriting divisions to discuss the 

purpose of the rule, costs and benefits of the rule, what the Commission should 

discuss in the economic analysis, and whether and how the Commission can 

quantify benefits and costs. 

On the basis of interviews and our review and analyses of documentation, we 

determined that RSFI is involved in all three stages (pre-proposal, proposing, and 

adopting) of the rulemaking process. 
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SEC’s Hiring of Additional Economists for Rulemaking

Since the passage of the Dodd-Frank Act, the SEC has hired additional 

economists. Prior to the passage of the Dodd-Frank Act,18 RSFI had 19 Doctor of 

Philosophy (Ph.D.) economists, one non-Ph.D. economist, and two research 

associates working on rulemakings. As of March 6, 2013, RSFI had 35 Ph.D.

economists, one non-Ph.D. economist, and six research associates who work on 

rulemakings.

RSFI’s staffing levels for rulemakings prior to the Dodd-Frank Act and after the 

Current Guidance are illustrated in Table 1 below:

 Table 1: RSFI Staffing Levels

 

Source: Office of Human Resources and RSFI’s staffing data.

SEC’s Plan for Hiring Additional Economists. On June 11, 2012, in a letter to 

Congress, former SEC Chairman Mary Schapiro informed Congress that RSFI 

would hire, in the near future, 16 economists with Ph.D.’s and that the 

Commission had requested 20 additional economist positions as part of its fiscal 

year 2013 budget. The former SEC Chairman further stated, “The potential need 

for additional economists beyond this will be analyzed on a going forward basis, 

 18 The Dodd-Frank Act was enacted on July 21, 2010. According to former SEC Chairman Mary Schapiro’s 

Testimony on Continued Oversight of the Implementation of the Wall Street Reform Act before the United 

States Senate Committee on Banking, Housing, and Urban Affairs on December 6, 2011, the Dodd-Frank Act 

contains 90 provisions that require the SEC to engage in rulemakings.

19 The IPA (Intergovernmental Personnel Act) provides, through a Mobility Program, for the temporary 

assignment to the Federal Government of personnel from state and local governments, colleges and 

universities, Indian tribal governments, Federally funded research and development centers, and other 

eligible organizations. The program helps Federal agencies meet their needs for hard-to-fill positions through 

the temporary assignment of skilled personnel from those entities.

Staff Category Prior to DoddFrank Act March 2013

Full-time SEC Economist 

with Ph.D.

18 29

Full-time SEC Economist 

without Ph.D.

0 1

IPA19 Economist with Ph.D. 1 6

IPA Economist without 

Ph.D.

1 0

Total Number of RSFI 

Economists

20 36

Full-time SEC

Research Associates

2 6

Total Number of RSFI 

Rulemaking Staff

22 42
Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page 12

and our ability to hire economists to fill these positions in the future will depend on 

the resources provided by Congress.”20

In 2012, RSFI hired 16 Ph.D. economists. RSFI informed us that due to the 

continuing resolution, the SEC’s fiscal year 2013 staffing requests, including

RSFI’s requests, were not approved. However, the SEC’s Budget Governance 

Committee21 approved RSFI’s request to hire, from external sources, nine

additional financial economists for fiscal year 2013. 

OIG’s Review of RSFI Economists Hired. To determine how the SEC 

addressed RSFI’s need for economists, we obtained a list that contained the 

names of 14 economists that the SEC hired from March through November 2012

to evaluate the economic analyses for the SEC’s rulemaking initiatives. We 

obtained and reviewed the job descriptions, vacancy announcements, and 

resumes for the 14 RSFI economists. In our review, we found that the economists 

hired during that period had the financial industry knowledge consistent with the 

vacancy announcements.

22 

Chief Economist’s Involvement and Concurrence 

Overview of Chief Economist’s Involvement in Economic Analysis. In June 

2012, the Chief Economist’s process for concurring with economic analyses was 

formalized. The Chief Economist is actively involved in the three stages of 

rulemaking and concurs with the economic analysis in the proposing and adopting 

stages. As Commission staff begins drafting the rule, the Chief Economist

discusses, with RSFI staff, major economic issues, RSFI’s strategy, and data 

analysis required for the rule. Throughout the rulemaking process, RSFI staff 

members meet with the Chief Economist to discuss the progress and status of the 

rules and information pertinent to the economic analysis. Before the Chief 

Economist concurs with the economic analysis, he meets with RSFI staff working 

on the rule, discusses his observations, and provides additional guidance as 

necessary. When the draft of the rule is ready for circulation to the 

Commissioners, the Chief Economist determines whether the economic analysis 

for a rule is satisfactory. RSFI then communicates the Chief Economist’s 

concurrence, and the rulewriting division includes that concurrence in the action 

memorandum circulated to the Commissioners.

23 

 20 Letter from the former SEC Chairman, Mary Schapiro, to Chairman Patrick McHenry, Subcommittee on 

TARP (June 11, 2012), p. 3.

21 The SEC established the Budget Governance Committee in 2011 to ensure a strategic staffing approach.

22 The hired economists’ resumes or supporting documents indicated financial industry knowledge in the 

following areas: corporate finance, investment, credit risk, capital markets, etc. However, we did not verify 

the assertions made by the applicants or the merits of the vacancy announcements.

23 The Chief Economist concurred in all of the economic analyses we reviewed. RSFI stated that the 

rulewriting divisions should not formally circulate a rule to the Commissioners if the Chief Economist does not 
Implementation of Current Guidance on Economic Analysis June 6, 2013

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Chief Economist’s Involvement in the Different Rulemaking Stages. The 

Chairman’s office sets priorities for rulemaking and informs rulewriting divisions, 

RSFI, and OGC of those priorities. On the basis of our audit objectives, we 

outlined the Chief Economist’s involvement in each stage of rulemaking as 

discussed below and illustrated previously in Figure 1.

Pre-Proposal Stage. Before the responsible division begins drafting a rule in the 

pre-proposal stage, staff in the rulewriting division meets with RSFI staff to 

provide background on the prospective rule and to get initial input from the RSFI 

economist. The Chief Economist meets with RSFI staff to discuss major 

economic issues, RSFI’s strategy, and data analysis required for the rule. If the 

rule is complex, the Chief Economist also discusses with the division director 

economic analysis issues that are relevant to the rules. According to RSFI, its

economists participate in the rulemaking division’s preparation of a term sheet, 

which contains a high-level outline of an economic analysis.

Proposing Stage. As the rulewriting division drafts the proposed rule, RSFI staff 

coordinate with the rulewriting division’s staff and assist in preparing the economic 

analysis. RSFI staff inform the Chief Economist of the progress of the rules and

discuss information pertinent to the economic analysis. RSFI staff also meets 

with rulewriting divisions and communicates with them by phone or email during 

the rulemaking process. Each week the Chief Economist meets with the RSFI

assistant directors to discuss the status of rulemakings and the rulemaking 

division’s activities. RSFI staff provide the Chief Economist with a written 

summary that discusses the components of the economic analysis (baseline, 

alternatives, etc.) for the rulemakings.

Before the Chief Economist concurs with the economic analysis, he meets with 

the RSFI staff working on the rule, discusses his observations, and provides 

additional guidance as necessary. RSFI staff incorporate the Chief Economist’s 

changes into the economic analysis and send it to the rulewriting divisions with 

the changes highlighted. The assistant director and economist(s) who are 

assigned to the rule ensure that the Chief Economist’s changes are included in 

the draft rule release. This is part of the process for obtaining the Chief 

Economist’s concurrence with the rule’s economic analysis. 

Additionally, the Chief Economist meets with division directors to discuss 

significant issues on rules. He meets with the Commissioners regularly to 

maintain awareness of current issues, discusses the Commissioners’ general 

concerns about economic issues, and explains the rationale for a specific

economic analysis.

During his review of the rules, the Chief Economist focuses on whether the 

economic ideas presented are sound and whether the SEC framed the economic 

 concur with the economic analysis. RSFI staff informed the OIG that they are not aware of any instance 

where the Chief Economist did not concur with the economic analysis.
Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page 14

ideas logically. He also verifies that the economic analysis complies with the 

Current Guidance requirements of having a consistent baseline, quantifying

benefits and costs where appropriate, discussing alternatives to the rule, etc.

The rulewriting division determines when to submit its action memorandum to the 

Commission recommending action on a proposed rule. The rulewriting division is 

responsible for obtaining, and documenting in the action memorandum, the 

concurrence of the Chief Economist in the economic analysis for that proposing 

release. Once the Chief Economist determines that the economic analysis for a 

proposing release is satisfactory, RSFI communicates the Chief Economist’s 

concurrence to the relevant staff in the rulewriting division. RSFI staff stated that 

the rulewriting divisions should not formally circulate the proposing release to the 

Commissioners if the Chief Economist does not concur with the economic 

analysis. RSFI staff told us that they are not aware of any instances in which the 

Chief Economist has not concurred with a rule’s economic analysis. 

Adopting Stage. The rulewriting divisions, in coordination with RSFI, revise and 

refine the economic analysis on the basis of comments received on the proposed 

rule and additional analyses that they determines are necessary. The Chief 

Economist reviews the adopting rule and indicates whether he concurs with the 

economic analysis. 

RSFI stated the rulewriting divisions should not formally circulate the adopting 

release to the Commissioners if the Chief Economist does not concur with the 

economic analysis. 

Concurrence Process Before the Current Guidance. Before issuance of the 

Current Guidance, the Chief Economist had an informal process for reviewing and

concurring with economic analyses for rules. He communicated his agreement or 

disagreement with the economic analysis of the proposed rulemaking either 

verbally or in an email to division directors or rulewriting divisions. Below is an 

example of language in an action memorandum that the SEC used prior to 

issuance of the Current Guidance.

The draft release includes an economic analysis. We consulted 

with the Office of the General Counsel and the Division of Risk, 

Strategy, and Financial Innovation concerning this analysis. 

Concurrence Process After the Current Guidance. The RSFI Chief 

Economist’s concurrence process was formalized as reflected in a June 2012 

email.24 The former SEC Chairman agreed with the process, which requires that 

the rulewriting divisions obtain the Chief Economist’s formal concurrence on 

 24 June 11, 2012 email between RSFI and the former SEC Chairman’s Office.
Implementation of Current Guidance on Economic Analysis June 6, 2013

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economic analyses for the proposing and adopting stages of rules.25 The 

concurrence process required the rulewriting divisions to use, in the action 

memorandum, standard language that indicates the Chief Economist’s 

concurrence with the economic analysis.26 Below is an example of standard 

language from an action memorandum after the Current Guidance. 

The Chief Economist concurs in the economic analysis contained in 

the attached draft release entitled “XXXX” and dated “XX XX, 

XXXX.” RSFI Staff will review all changes made to this draft 

release and notification will be provided to the Commission if those 

changes result in the Chief Economist no longer concurring in the 

economic analysis.

Conclusion

Since the issuance of the Current Guidance, the Commission has taken steps to 

improve its procedures for economic analysis by requiring that the rulewriting 

divisions engage with RSFI before the Commission begins writing rules. Further, 

the SEC has hired and added a number of financial economists to the process for 

economic analysis. Lastly, on the basis of interviews and our review of supporting 

documents, we found that the Chief Economist was involved in the three stages of 

the rulemaking process and concurred with the economic analyses in the 

proposing and adopting stages of rulemakings. 

The OIG makes no recommendation for this finding. 

 25 The Current Guidance requires RSFI’s formal concurrence on the economic analysis for both proposing 

and adopting rules. By concurring with the economic analysis, the Chief Economist asserts that the 

economic ideas presented are sound and that the SEC framed the economic ideas logically. This 

concurrence ensures that the economic analysis is consistent with the Current Guidance (i.e., it ensures that 

the economic analysis has a consistent baseline, quantifies benefits and costs where appropriate, and 

discusses alternatives to the rule). The Division responsible for a rule prepares an action memorandum to 

the Commission for each proposed or final rule when a rulemaking release is circulated to the Commissioners 

for their consideration. An action memorandum discusses a rulewriting division’s specific recommendations 

and rationale for a rulemaking release. The rulemaking release to be considered and voted on by the 

Commission is attached to the action memorandum. The concurrence language is part of the action 

memorandum.

26 The former Chairman, Mary Schapiro, approved the concurrence language for the action memorandum.
Implementation of Current Guidance on Economic Analysis June 6, 2013

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Finding 3: The Current Guidance Includes 

Recommendations from the SEC OIG and

Other Commenters 

The Commission incorporated, into its Current Guidance,

recommendations that it received from the SEC OIG and 

other commenters. Specifically, the Current Guidance

addressed recommendations from the SEC OIG’s follow-up 

review of Dodd-Frank rulemaking, a GAO report on DoddFrank rulemaking, and the U.S. Court of Appeals opinion 

that vacated an SEC rule.

Recommendations in SEC OIG Report No. 499 

The OIG issued Follow-Up Review of Cost-Benefit Analyses in Selected SEC 

Dodd-Frank Act Rulemakings, Report No. 499, on January 27, 2012 (Report No. 

499). The Report contained six recommendations; the SEC has implemented and 

closed all of those recommendations. We found that the Current Guidance fully 

addressed the recommendations in Report No. 499. Table 2 below summarizes 

that information. 

Table 2: Incorporation of SEC OIG Recommendations in the 

Current Guidance

SEC OIG Report No. 499 

Recommendations 

Text of Current Guidance

1. SEC rulewriting divisions and RSFI should 

consider ways for economists to provide 

additional input into cost-benefit analyses of 

SEC rulemakings to assist in including both 

quantitative and qualitative information to the 

extent possible.

To make the best use of RSFI’s expertise, economists 

should be involved at the earliest stages of the 

rulemaking process (e.g., before the specific preferred 

regulatory course is determined) and throughout the 

course of writing proposed and final rules. RSFI 

economists should be fully integrated members of the 

rulewriting division and contribute to all elements of the 

rulewriting process (p. 15).

2. OGC, in consultation with RSFI, should 

reconsider its guidance that the SEC should 

perform economic analyses for rulemaking 

activities to the extent that the SEC exercises 

discretion and should consider whether a prestatute baseline should be used whenever 

possible.

As a policy matter, where a statute directs rulemaking, 

rulewriting staff should consider the overall economic 

impacts, including both those attributable to 

Congressional mandates and those that result from an 

exercise of the Commission’s discretion... (p. 8).

3. SEC rulemaking divisions should generally 

use a single, consistent baseline in the costbenefit analyses of their rulemakings related 

to a particular topic. The baseline being used 

should be specified at the beginning of the 

cost-benefit analysis section. If multiple 

baselines are appropriate, such as for 

evaluating alternative approaches or 

explaining the SEC’s use of discretion, they 

should also be explained and justified.

The baseline being used should be specified, either at 

the beginning of the economic analysis section or as a 

part of a general introduction to the economic issues that 

will be considered throughout the release. Using the 

same baseline assumptions throughout the economic 

analysis of each element of the proposed rule is 

important (p. 8).
Implementation of Current Guidance on Economic Analysis June 6, 2013

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SEC OIG Report No. 499 

Recommendations 

Text of Current Guidance

4. SEC rulewriting divisions should consider 

discontinuing the practice of drafting separate 

cost-benefit analysis and efficiency, 

competition, and capital formation sections 

and instead provide a more integrated 

discussion of these issues in rule releases.

Combine the economic analysis considering costs and 

benefits with consideration of the effects on efficiency, 

competition, and capital formation (p. 14).

5. The Commission should consider directing 

rulewriting divisions to (a) explicitly discuss 

market failure as a justification for regulatory 

action in the cost-benefit analysis of each rule 

that is based in whole or in part on perceived 

market failure or (b) in the absence of market 

failure, demonstrate a compelling social 

purpose that justifies regulatory action.

Rule releases must include a discussion of the need for 

regulatory action and how the proposed rule will meet 

that need. In some circumstances, there will be more 

than one justification for a particular rulemaking. 

Frequently, the proposed rule will be a response to a 

market failure that market participants cannot solve 

because of collective action problems (p. 5).

6. SEC rulewriting divisions should consider 

including internal costs and benefits in the 

cost-benefit analyses of rulemakings.

Depending on the significance of the costs and benefits 

of a rule that are internal to the SEC, it can be 

appropriate to consider them in the cost-benefit analysis 

(p. 12). 

Source: SEC OIG Report No. 499 and Current Guidance

GAO Report Recommendation

The Current Guidance references GAO Report No. 12-151, Dodd-Frank Act 

Regulations: Implementation Could Benefit from Additional Analyses and 

Coordination, in two places. GAO’s report stated, “To strengthen the rigor and 

transparency of their regulatory analyses, we recommend that the federal financial 

regulators take steps to better ensure that the specific practices in OMB’s 

regulatory analysis guidance are more fully incorporated into their rulemaking 

policies and consistently applied.”27 

The Current Guidance notes that although SEC is not required to follow the 

guidelines for regulatory economic analysis (enumerated in several executive 

orders)

28 that other executive agencies must follow, the Current Guidance “draws 

on principles set forth in those orders and in the Office of Management and 

Budget’s Circular A-4 (2003)....”

29 

U.S. Court of Appeals Opinion

In its request for the SEC OIG to review the implementation of the Current 

Guidance, the Chairman of the House Oversight Committee referenced an

opinion of the U.S. Court of Appeals for the District of Columbia Circuit. See

Business Roundtable and Chamber of Commerce v. Securities and Exchange 

 27 GAO Report No. 12-151, Dodd-Frank Act Regulations: Implementation Could Benefit from Additional 

Analyses and Coordination (November 2011), p. 39.

28 These executive orders include Executive Order 12866, Regulatory Planning and Review, and Executive 

Order 13563, Improving Regulation and Regulatory Review.

29 Current Guidance on Economic Analysis in SEC Rulemakings (March 2012), p. 4.
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Commission (Business Roundtable).

30 The petitioners in Business Roundtable

challenged the Securities Exchange Act of 1934 (Exchange Act) Rule 14a-11 

(Proxy Access Rule)31 on the basis that, among other things, “the Commission 

failed adequately to consider the rule’s effect upon efficiency, competition, and 

capital formation, as required by Section 3(f) of the Exchange Act and Section 

2(c) of the Investment Company Act of 1940....”32 Section 3(f) of the Exchange 

Act and Section 2(c) of the Investment Company Act require that whenever it is 

engaged in rulemaking and “is required to consider or determine whether an 

action is necessary or appropriate in the public interest, the Commission shall also 

consider, in addition to the protection of investors, whether the action will promote 

efficiency, competition, and capital formation.” 15 U.S.C. §§ 78c (f) and 80a-2(c). 

The U.S. Court of Appeals agreed with the petitioners and vacated the rule, 

finding that the SEC had “failed...adequately to assess the economic effects of a 

new rule.”

33 

The court agreed with the petitioners’ argument that the SEC promulgated the rule 

in violation of the Administrative Procedure Act and that the SEC acted arbitrarily 

and capriciously by having failed “adequately to assess the economic effect of a 

new rule.” The court set forth five ways that the SEC’s analysis failed. 

We reviewed the Business Roundtable decision and compared it to the Current 

Guidance to determine whether the SEC addressed the court’s findings on the 

SEC’s analytical failures. As shown in Table 3 below, we found that the Current 

Guidance generally addressed the court’s findings and incorporated them into 

guidelines to avoid analytical failures in future rulemakings.

Table 3: Incorporation of U.S. Court of Appeals Opinion in the Current

Guidance

Excerpts from U.S. Court of 

Appeals Opinion Text of Current Guidance

[T]he Commission inconsistently and 

opportunistically framed the costs and 

benefits of the rule...

Frame costs and benefits neutrally and 

consistently. The release should evaluate the 

costs and benefits even-handedly and candidly, 

acknowledging any limitations in the data or 

quantifiable information (p. 14).

 30 Business Roundtable, 647 F.3d 1144 (D.C. Cir. 2011).

31 The Proxy Access Rule required a company subject to the Exchange Act proxy rules to include in its proxy 

materials the name of a person or persons nominated by a shareholder or group of shareholders to the 

company’s board of directors, provided that the shareholder or group of shareholders met certain criteria.

32 Business Roundtable, 647 F.3d at 1146. 

33 Id.
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Excerpts from U.S. Court of 

Appeals Opinion Text of Current Guidance

[The Commission] failed adequately to 

quantify the certain costs or to explain 

why those costs could not be quantified...

Quantify expected benefits and costs to the extent 

feasible...

Identify and discuss uncertainties underlying the 

estimates of benefits and costs...

Explain why costs and benefits cannot be 

quantified (p. 12-13).

[The Commission] neglected to support its 

predictive judgments...

Support predictive judgments and clearly address 

contrary data or predictions (p. 14).

The release should also include a discussion of 

any existing studies or data that bear on the 

proposal so that the public knows what studies or 

data we are relying on, can comment on it, and can 

provide additional data relevant to the topic (p. 16).

[The Commission] contradicted itself... Frame costs and benefits neutrally and 

consistently (p. 14).

[The Commission] failed to respond to 

substantial problems raised by the 

commenters.

As part of their continuing analysis of the potential 

economic effects of the proposed rule, the RSFI 

economists assigned to the rule should pay 

particular attention to any comment letters 

containing economic analysis and data. Where 

appropriate, RSFI economists should attend 

meetings with commenters or other third parties 

regarding the proposed rule, particularly in those 

instances when the rulewriting division expects that 

the outside party will provide additional data or 

comment upon the economic analysis or data 

contained in the proposing release (p. 16).

As part of the development of the adopting release, 

the staff should prepare a high-level economic 

analysis (prepared by or with the assistance of 

RSFI economists) that addresses (1) any 

significant policy alternatives suggested by 

commenters that are not recommended for 

adoption; (2) other comments received relevant to 

the economic effects of the proposed rule and 

realistic alternative approaches; and (3) data 

gathered (p. 16).

Source: Business Roundtable, 647 F.3d 1144, and Current Guidance.

Conclusion

The Current Guidance incorporates recommendations from various commenters

on the SEC’s economic analysis in rulemakings, including those from the SEC 

OIG, GAO, and a U.S. Court of Appeals opinion. 

The OIG makes no recommendation for this finding. 
Appendix I

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Abbreviations

Business Roundtable Business Roundtable and 

Chamber of Commerce 

v. Securities and Exchange 

Commission

CF Division of Corporation Finance

Current Guidance Current Guidance on Economic 

Analysis in SEC Rulemakings

Dodd-Frank Act Dodd-Frank Wall Street Reform 

and Consumer Protection Act

Exchange Act Securities Exchange Act of 1934

GAO Government Accountability Office

House Oversight 

Committee

U. S. House of Representatives 

Committee on Oversight and 

Government Reform

IM Division of Investment 

Management

IPA Intergovernmental Personnel Act

OGC Office of the General Counsel

OIG Office of Inspector General

OMB Office of Management and Budget

OS Office of the Secretary

Ph.D. Doctor of Philosophy

Proxy Access Rule Securities Exchange Act of 1934 

(Exchange Act) Rule 14a-11

RSFI Division of Risk, Strategy, and 

Financial Innovation

SEC or Commission U.S. Securities and Exchange 

Commission

Subcommittee on 

TARP

Subcommittee on TARP, Financial 

Services and Bailouts of Public 

and Private Programs

TARP Troubled Assets Relief Program

TM Division of Trading and Markets
Appendix II

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Report No. 516

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Scope and Methodology

We conducted this performance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and perform 

the audit to obtain sufficient, appropriate evidence to provide a reasonable basis 

for our findings and conclusions based on our audit objectives. We determined

that the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. 

Scope. Our audit focused on the Current Guidance for economic analysis in SEC 

rulemakings and on proposed, final, and interim final temporary34 rules issued 

between March 16, 201235 and November 30, 2012. We also reviewed the 

practices and procedures for economic analysis of the rulewriting divisions, RSFI, 

and OGC. Further, the OIG reviewed laws, regulations, and policies applicable to 

economic analysis. We also interviewed staff of the rulewriting divisions, OGC, 

and RSFI, including the Chief Economist. 

Methodology. To achieve the objective of determining whether the SEC 

established and implemented procedures for a methodical economic analysis 

process in accordance with its Current Guidance, we asked the rulewriting 

divisions, OGC and RSFI whether they had policies and procedures incorporating

that guidance. We then examined existing internal policies and procedures. 

Additionally, we reviewed the Current Guidance and developed a standard 

checklist to obtain an understanding of the Commission’s process for economic 

analysis. Further, we interviewed the Commission staff to determine what 

processes they had for preparing economic analyses and to assess whether their 

practices align with the principles of the Current Guidance. 

To meet the objective of determining whether the Commission developed and uses 

procedures to improve the process for economic analysis, we verified that the 

Commission issued the Current Guidance, which incorporates best practices for 

conducting economic analyses and provides a broad guide on what an economic 

analysis should include, such as a baseline, alternative approaches, and 

discussions on costs and benefits of a rule. We also assessed whether the SEC 

hired additional economists with financial industry knowledge by reviewing 

resumes of the hired employees and comparing their experience to job 

descriptions and vacancy announcements. The OIG also interviewed economists

working on the rulemaking initiatives to determine their knowledge about economic 

analysis. 

 34 The SEC issues interim final temporary rules when the requirement for a rule is urgent and the Commission 

cannot follow the normal course of rulemaking process such as collecting comments from the public. 

35 OGC and RSFI issued the Current Guidance on March 16, 2012.
Appendix II

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Report No. 516

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Further, we met with RSFI staff and the Chief Economist to obtain an 

understanding about the Chief Economist’s review and concurrence process for

economic analyses. We also reviewed action memoranda and emails from RSFI 

to rulewriting divisions for a sample of nine rules36 to determine if the rulewriting 

divisions obtained the Chief Economist’s concurrence on the economic analysis 

before transmitting the rule to the Commissioners for a vote on the rule. 

Lastly, we reviewed emails between rulewriting divisions and RSFI, comments 

RSFI made on draft economic analyses, term sheets, internal memoranda RSFI 

prepared for rules, etc., and met with RSFI staff and rulewriting divisions to discuss 

the coordination between them for conducting economic analysis. 

To meet the objective of determining whether the Current Guidance incorporates 

the SEC OIG’s and other commenters’ recommendations issued to the SEC on 

rulemaking, we reviewed recommendations from SEC OIG audit reports and GAO 

audit reports on rulemaking, comments on the Current Guidance from the 

Commissioners, and a legal opinion on SEC rulemaking. We analyzed the 

recommendations and comments to determine whether the Commission

incorporated them into the Current Guidance.

Internal Controls. For our audit, we assessed the Commission’s internal controls 

significant to our objectives on the basis of OMB Circular A-123, Management’s 

Responsibility for Internal Control. That circular states, “Management is 

responsible for developing and maintaining internal control activities that comply 

with the following standards...control environment, risk assessment, control 

activities, information and communication, and monitoring.” The internal controls

that we assessed included: 1) the Chief Economist’s review and concurrence 

process for economic analysis; 2) OGC’s review of rulemakings to ensure that the 

Commission addressed legal requirements; and 3) the rulewriting division’s internal 

review process, such as the preparation of the economic analysis by staff 

attorneys, and senior management’s (associate directors, deputy directors, and 

directors) review of the economic analysis.

Information Systems Controls. We used computer-processed data from the 

Office of Human Resources to determine the number of economists in RSFI as of 

March 6, 2013. RSFI verified that the number of economists as of March 6, 2013,

was accurate. We did not assess the system that generated the computerprocessed data. 

Judgmental Sampling. To identify our sample, we used judgmental sampling due 

to the small universe of rules in our scope. Between March 16, 2012, and 

November 30, 2012, the Commission released 23 rules—5 proposed rules, 16 final 

 36 Two of nine rules were issued prior to the implementation of the formal concurrence process. The action 

memoranda for these rules stated that the rulewriting divisions consulted with RSFI, instead of including the 

standard concurrence language. Further, there were no emails from RSFI to rulewriting divisions, conveying 

the Chief Economist’s formal concurrence with the rules. 
Appendix II

Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

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rules and 2 interim final temporary rules. Out of the 23 rules, 8 rules did not 

require an economic analysis because they reopened a period for comment,

corrected a typographical error, or adopted an updated Electronic Data Gathering, 

Analysis, and Retrieval filer manual. Out of the 15 rules that required an economic 

analysis, the OIG selected 9 rules consisting of 3 proposing rules, 5 final rules and 

1 interim final temporary rule for review, on the basis of its judgment. We ensured 

that all three rulewriting divisions—TM, CF, and IM—were represented in our 

sample and that the nine samples covered different areas of the securities laws. 

The OIG reviewed the rules to assess involvement of RSFI and to determine 

whether the Chief Economist concurred in the economic analyses. Table 4 below 

identifies the nine rules that the OIG reviewed.

Table 4: Rules the OIG Reviewed

Rule 

Release 

Number

Rule Issue Date Responsible 

Rulewriting

Division

Stage Name of Rule

1 34-66868 April 27, 2012 TM Adopting Further Definition of “Swap 

Dealer,” “Security-Based 

Swap Dealer,” “Major Swap 

Participant,” “Major SecurityBased Swap Participant” and 

“Eligible Contract Participant”

2 34-67405 July 11, 2012 TM Temporary Extension of Interim Final 

Temporary Rule on Retail 

Foreign Exchange 

Transactions 

3 34-67457 July 18, 2012 TM Adopting Consolidated Audit Trail

4 34-67717 August 22, 2012 CF Adopting Disclosure of Payments by 

Resource Extraction Issuers

5 33-9354 August 29, 2012 CF Proposing Eliminating the Prohibition 

Against General Solicitation 

and General Advertising in 

Rule 506 and Rule 144A 

Offerings

6 IA-3483 October 9, 2012 IM Proposing Temporary Rule Regarding 

Principal Trades with Certain 

Advisory Clients

7 34-68071 October 18, 2012 TM Proposing Capital, Margin, and 

Segregation Requirements for 

Security-Based Swap Dealers 

and Major Security-Based 

Swap Participants and Capital 

Requirements for BrokerDealers

8 34-68080 October 22, 2012 TM Adopting Clearing Agency Standards

9 IC-30268 November 19, 2012 IM Adopting Purchase of Certain Debt 

Securities by Business and 

Industrial Development 

Companies Relying on an 

Investment Company Act 

Exemption

Source: OIG Generated.
Appendix II

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Report No. 516

Page 24

Prior Audit Coverage. The SEC OIG conducted two reviews of the SEC’s

economic analysis in rulemaking.

• Report of Review of Economic Analyses Performed by the Securities and 

Exchange Commission in Connection with Dodd-Frank Act Rulemakings, 

SEC OIG, June 13, 2011.

• Follow-Up Review of Cost-Benefit Analyses in Selected Dodd-Frank Act 

Rulemakings, Report No. 499, January 27, 2012.

We did not make any recommendations in the June 13, 2011, report. In Report 

No. 499, the OIG made six recommendations that were closed in June 2012. 

During this audit, we verified that the Commission fully implemented the 

recommendations. 
Appendix III

Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page 25

Criteria

Administrative Procedure Act of 1946, 5 U.S.C. §§ 501 et. seq. Provides 

minimal procedural standards that Federal administrative agencies must follow. 

With respect to rulemaking, the APA requires agencies to give the public advance 

notice of the contents of a proposed rule and to offer members of the public an 

opportunity to express their views on the proposed rule. The APA also provides 

that courts may set aside any rule found to be “arbitrary, capricious, an abuse of 

discretion, or otherwise not in accordance with law.”

Current Guidance on Economic Analysis in SEC Rulemakings. Provides 

guidance on economic analysis and broadly outlines best practices in conducting 

economic analysis. Discusses four requirements of a good regulatory economic 

analysis and other factors necessary for a comprehensive economic analysis.

Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 

No. 111-203, July 21, 2010. Reformed the financial regulatory system, including 

how financial regulatory agencies such as the SEC operate, and mandated that the 

SEC undertake a significant number of studies and rulemakings, including 

regulatory initiatives addressing derivatives; asset securitization; credit rating 

agencies; hedge funds, private equity funds, and venture capital funds; municipal 

securities; clearing agencies; and corporate governance and executive 

compensation.

Jumpstart Our Business Startups Act, Public Law No. 112-106, April 5, 2012. 

Requires the SEC to write rules and issue studies on capital formation, disclosure,

and registration requirements.

Office of the General Counsel, SEC, Compliance Handbook, revised October

1, 1999. Provides guidance applicable to SEC rulemaking and includes guidance 

specific to developing cost-benefit analyses.

Office of Management and Budget (OMB) Circular A-4, Regulatory Analysis, 

September 17, 2003. Provides OMB’s guidance to Federal agencies on 

developing cost-benefit analyses required under Executive Order 12866 and 

related authorities.

OMB Circular A-123, Management’s Responsibility for Internal Control. 

Establishes that management has a fundamental responsibility to develop and 

maintain effective internal controls.

Paperwork Reduction Act of 1980, 44 U.S.C. § 3501, et seq. Gave authority 

over the collection of certain information to OMB and mandated that Federal 

agencies obtain an OMB control number before promulgating a form that will 

impose an information collection burden on the general public. Also required 
Appendix III

Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page 26

agencies to solicit and review public comments on the information collection 

requirements of proposed rules, to evaluate the need for information collection, 

and to provide an estimate of the information collection burden.

Regulatory Flexibility Act of 1980, 5 U.S.C. § 601, et seq. Requires agencies to 

consider the needs of small entities in evaluating proposed and final rules for all 

rules subject to notice and comment under the APA and to describe the impact of 

proposed and final rules on small entities, unless the agency head certifies that the 

rule will not have a significant economic impact on a substantial number of small 

entities.

Section 23(a)(2) of the Securities Exchange Act of 1934, 15 U.S.C. § 78w(a)(2). 

Requires the SEC to consider the effect on competition of any rule promulgated 

under the act.

Securities Act of 1933, Securities Exchange Act of 1934, Investment 

Company Act of 1940, and Investment Advisers Act of 1940. Contain 

provisions that require the Commission, when it is engaged in rulemaking and is 

required to consider or determine whether an action is necessary or appropriate in 

the public interest, to consider, in addition to the protection of investors, whether 

the action will promote efficiency, competition and capital formation.

U.S. Court of Appeals Opinion, Business Roundtable v. SEC, 647 F.3d 1144 

(D.C. Cir. 2011). The petitioners in Business Roundtable challenged the

Exchange Act Rule 14a-11 (Proxy Access Rule) on the basis that, among other 

things, the Commission failed adequately to consider the rule’s effect upon 

efficiency, competition, and capital formation, as required by Section 3(f) of the 

Exchange Act and Section 2(c) of the Investment Company Act of 1940, which 

require that whenever it is engaged in rulemaking and the Commission is required 

to consider or determine whether an action is necessary or appropriate in the 

public interest. The U.S. Court of Appeals agreed with the petitioners and vacated 

the rule, finding that the SEC had failed adequately to assess the economic effects 

of a new rule. 
Appendix IV

Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page 27

Recommendation

Recommendation 1:

The Chairman’s Office, in coordination with the Office of the General Counsel 

(OGC) and the Division of Risk, Strategy, and Financial Innovation (RSFI), should 

issue–to SEC rulewriting divisions, RSFI, and OGC–written operating procedures 

for economic analysis that implement the Current Guidance on Economic Analysis 

in SEC Rulemakings.
Appendix V

Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page 28

Management Comments
Appendix V

Implementation of Current Guidance on Economic Analysis June 6, 2013

Report No. 516

Page 29
Audit Requests and Ideas

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