The strategy has spread to target other federal agencies as well. In December, two groups representing Wall Street firms filed suit against the Commodity Futures Trading Commission, arguing that a rule to limit speculation used a flawed cost- benefit analysis. Last month, the U.S. Chamber of Commerce and the Investment Company Institute filed a similar lawsuit challenging a CFTC rule affecting mutual funds.

Roel Campos, a former SEC commissioner, said the court decision combined with pressure from Capitol Hill could prevent the SEC and other agencies from moving forward with a wide variety of rules, not just those required by Dodd-Frank.

"The business community has been given a new powerful tool to use against any rulemakings they dislike," said Campos, who is now a partner at the Locke Lord LLP law firm in Washington. "The standard will prevent the agency from being able to deal with anything that's controversial."

SEC rules still waiting to be finalized include a regulation that would require companies to disclose whether they use material that was mined in the Democratic Republic of the Congo and another proposal that would govern executive compensation. A recently enacted law that eases securities regulation for closely held firms and newly public companies will also add to the SEC's rule-writing responsibilities.

As the SEC's to-do list gets longer, congressional pressure on the agency is intensifying. Since April 17, SEC Chairman Mary Schapiro has spent more than five hours before two House committees answering at least 50 questions about how the agency calculates the cost of rules it proposes.

New Legislation

Senator David Vitter, a Louisiana Republican, introduced legislation April 26 that would require the SEC to study the cost of its proposals. The bill is similar to one that Garrett is shepherding through the House.

"This shouldn't be remarkable," said Eugene Scalia, a lawyer at Gibson Dunn & Crutcher LLP in Washington. "It should be normal for federal agencies to look at how costly their rules are before imposing them."

Scalia, son of Supreme Court Justice Antonin Scalia, helped lay the foundation that would ultimately spur the debate in Congress. He won a case at the U.S. Court of Appeals in July that overturned an SEC rule that would have expanded shareholder rights. In the decision, U.S. Circuit Judge Douglas Ginsburg wrote that the SEC "inconsistently and opportunistically framed the costs and benefits" of the shareholder proposal.

Representative Patrick McHenry, a North Carolina Republican and chairman of a House Oversight and Government Reform subcommittee, told Schapiro during an April 17 hearing that the decision included "particularly harsh language" from the court.

Garrett said the results of the shareholder case, which was brought by the U.S. Chamber of Commerce and the Business Roundtable, was an "indicator that we're not just speaking off the top of our head."

"We're actually speaking and are able to cite an independent third party: the court," he said.

Schapiro has told lawmakers that calculating the cost and benefit of a rule is much harder than it sounds. Quantifying the benefits is particularly daunting, she said, because outcomes are often social improvements that are hard to quantify, such as increased transparency or enhanced financial stability.

Hard to Monetize

"The task of quantifying costs is difficult but the task of quantifying benefits is very much more difficult because they are often very, very hard to put a dollar number on to monetize," she said during the April 17 hearing. "Our challenge is to do the best we can."

Schapiro is attempting to comply with the proposed legislation ahead of time by instructing staff that all rules must be accompanied by an analysis that explains why the regulation is necessary, identifies alternative approaches and considers the costs and benefits on both a quantitative and qualitative basis.

At the hearing, McHenry thanked Schapiro for her "thoughtful attention to the concerns that we've raised," while expressing concern that rule-writers might try to exert influence over economists. He referred to an e-mail Sept. 13, 2010, between Meredith Cross, director of the SEC's corporate finance division, in which she asked that economists "not add qualitative cost-benefit discussions that could be controversial without having senior discussions."

The exchange reveals a "deeply held cultural problem with cost-benefit analysis if you have to have senior level discussions before an economist attaches any real cost that could raise problem," McHenry said.

Schapiro defended Cross to McHenry as "one of the finest public servants I have ever worked with" who "believes deeply in cost-benefit analysis."

Judith Burns, an SEC spokeswoman, wouldn't comment on the communication between rule-writers and economists.

Though Schapiro's stance has been well received by both Democrats and Republicans on Capitol Hill, it hasn't ended scrutiny of the agency.

"Make no mistake, this subcommittee intends to vigorously monitor the implementation of this document at the commission," McHenry told Schapiro. "We will hold Chairman Schapiro accountable for the commitments that she's made."

Bloomberg News

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