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The “cost-benefit” analysis for federal regulatory reviews may be getting a makeover. Last week, the White House Office of Management & Budget announced two developments:

1. Executive Order on Modernizing Regulatory Review – which raises the threshold that defines “significant regulatory action” requiring additional steps for review, from $100 million to $200 million in annual effects, and makes other changes to how the review process is conducted.

2. Proposed changes to “Circular A-4” – which hasn’t been updated since it was first issued in 2003 and addresses how the government calculates costs & benefits.

These updates have the potential to impact securities disclosure rulemaking, particularly as we stare down significant changes that companies believe will vastly increase their SEC compliance costs. I blogged earlier this year that the “estimated compliance burden” under the Paperwork Reduction Act is an important part of the SEC comment process for proposed rulemaking, even though it often doesn’t generate a lot of responses from public commenters.

Circular A-4 touches on the Papwerwork Reduction Act – and bigger-picture, covers how to assess a regulation – including its impact on public health & safety, economic impact and non-monetized and non-quantified effects – when conducting a cost-benefit analysis. The White House Council of Economic Advisers summarized the context and a few of the changes – here’s an excerpt:

In the 20 years since Circular A-4 was issued, economic conditions and best practices for benefit-cost analysis have evolved, and updating the Circular will make it easier to promote regulations that most enhance wellbeing.

For example, the proposed update expands discussion of critical regulatory needs, addressing market power, behavioral biases, distributional fairness, civil rights, and more. Currently, Circular A-4 focuses on a limited set of market failures as potential reasons to regulate.

The benefits & costs of regs don’t always fall on the same groups & even when they do, research shows that a given gain or loss has larger impact on lower-income people than on higher-income people. Currently, Circular A-4 doesn’t discuss distributional effects in much detail. The proposed revision substantially expands guidance on assessing distributional effects. It helps empower agencies to use income-weighted estimates in their analyses by providing them with a weighting methodology if they choose to do so.

There’s a 60-day public comment period and review process for the proposed changes, with specific questions set forth in this preamble. If adopted, the impact of this update on rulemaking also will depend on how federal agencies – like the SEC – implement it. However, it does signal a potential shift towards a more holistic approach to cost-benefit analyses, which could have implications for future securities disclosure regulations.

– Liz Dunshee