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Atkins Calls for Economic Justification for SEC Actions

Commissioner Paul Atkins, in recent remarks to the National Association for Business Economics, emphasized the importance of applying economics in making sound regulatory decisions. He said that view seemed to be the minority at times during his tenure at the SEC. Atkins believes that regulatory agencies should use economics not only in determining the effects of a regulatory action, but also in determining whether any action is needed at all.

Atkins said that Chairman Christopher Cox has been instrumental in ensuring that the SEC considers the economic ramifications of its regulatory actions. He cited Cox's decision to release the staff economists' studies last December before taking any further action on the SEC's mutual fund governance rules. Atkins called that decision "a watershed event in the life of a rule that has been marked by a dismissal of economic consequences."

Atkins commended the staff for a pilot program it conducted to determine whether the removal of the "tick test" would make shares more susceptible to downward manipulation. No evidence of such activity was found and the SEC subsequently proposed to eliminate the tick test across the board, according to Atkins. He hopes to see similar empirical methods used in the future.

Atkins said it is also wise to periodically reassess the impact of rules. He suggested that economists outside of the Commission could assist with the SEC's understanding of the impact of its rules. A number of the recent reports on the U.S. capital markets have also recommended that the SEC conduct a cost-benefit analysis before adopting new rules and afterward as well.

Atkins expressed concern that a looming problem may occur with FASB's Fin 48 on accounting for income taxes. Many companies urged FASB to extend the compliance date, but FASB declined to do so. Atkins questioned whether the standard suffers from the same lack of a materiality filter that plagued the PCAOB's auditing standard on internal controls. There are concerns that FIN 48 may cause a similar overdocumentation problem, he advised, since auditors will be driving the process.

Atkins also urged economists to assist the SEC by helping it to understand the complexity of the costs and benefits of its enforcement actions. Economists could help the SEC analyze the financial penalties that are imposed on corporations, he said. While the penalty guidelines the SEC adopted last year are helpful, Atkins said the difficulty is in resisting the temptation to seek "headline grabbing penalties" from corporations at the expense of shareholders. Economists could remind the SEC to look beyond the headlines and focus on the economic reality of its actions, he said.