Want to test Trump's plan to force bureaucrats to kill regulations? Start with the SEC

Want to test Trump's plan to force bureaucrats to kill regulations? Start with the SEC
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One of President Trump’s first official acts in office was to sign an executive order implementing a regulatory budget for federal agencies. It requires agencies to eliminate two rules for every new rule adopted. This new tool to rein in regulatory excess was modeled on successful reforms in the United Kingdom and Canada, and upheld a signature campaign promise. 

The reform is promising, but will it work in America? Here’s one way to find out.

It will take a substantial effort to ultimately get regulatory budgeting underway. First it must be designed, and then the White House Office of Management and Budget will need to develop a methodology to count the burden of regulations. Then the reform must survive current legal challenges. To prove meaningful, independent agencies will need to be included in a regulatory budget as well.


This can be accomplished either through an expanded executive order (the current one does not cover independent agencies like the Federal Communications Commission or the banking regulators) or through new legislation.


Sometimes it helps to start with a small-scale reform — call it a test case or pilot program — to establish credibility for wary critics of government regulatory reform. In Canada, for example, British Columbia led the way on regulatory budgeting. Its success paved the way for subsequent bipartisan adoption of regulatory budgeting at the federal level by the Canadian parliament.

Here at home, one independent agency, the Securities and Exchange Commission, oversees other agencies with regulatory power like the Public Company Accounting Oversight Board (or “PCAOB”). The PCAOB was created by the Sarbanes-Oxley Act in 2002 (or “SOX”) to regulate the auditing profession after the media attention to corporate scandals at WorldCom and Enron.

The SEC’s oversight of the PCAOB could serve as a unique pilot program for regulatory budgeting in the United States. The regulatory costs are relatively simple to estimate. The SEC, for example, has already conducted a number of surveys estimating the amount of money that companies spend to comply with major rules overseen by the auditing regulator. 

The most expensive rule overseen by the PCAOB is a requirement (under SOX 404) that expands auditors’ responsibilities to include companies’ internal fraud safeguards and financial statement accuracy. SOX 404 has been studied in depth by dozens of auditing and accounting professors around the country.

The SEC has authority to set a regulatory budget for the PCAOB. The SEC could begin by weighing the costs and benefits of the rules that the PCAOB oversees, like SOX 404, and the costs and benefits of day-to-day enforcement and inspection activity.

Some practices, like PCAOB inspections of Big Four accounting firms and management certifications of their internal controls, have substantial support in the accounting literature. Some studies suggest that enforcement actions against auditing firms provide valuable information to investors that impacts share prices for other clients of that auditor.

On the other hand, some rules, like those in SOX 404, have a far more mixed record in the empirical literature that suggests their costs substantially exceed their benefits for some classes of public companies.

SEC economists could help establish an appropriate budget for regulatory costs that the PCAOB would be allowed to impose on publicly traded companies. Note that the PCAOB’s costs are indirect for public company shareholders; auditors abide by its rules but companies are mandated to pay for their services.

A regulatory budget might also encourage the PCAOB to consider the extent to which its rules inhibit competition among auditing firms. At present only four accounting firm dominate the market for public auditing services. The GAO has observed that those four firms have what would be considered monopoly power in other contexts by antitrust regulators.

Under a regulatory budget, the PCAOB would be required to make hard choices about its priorities. The SEC could enforce it by establishing a schedule of penalties to the PCAOB’s fiscal budget if the PCAOB runs an ongoing imbalance in its regulatory budget.

In a sense, the SEC and the PCAOB already attempted a rough-cut version of regulatory budgeting when SOX 404 was reshaped in 2007. The reform was described as an attempt to decrease compliance costs while maintaining audit quality.

This proposal would formalize the SEC’s attempt at balancing costs and benefits at the PCAOB, and do so in an ongoing and more transparent way. It would further serve as a helpful pilot program as the president implements the type of regulatory budgeting that many other large Western democracies that have already adopted.

J.W. Verret is an associate professor at the Antonin Scalia Law School at George Mason University and a senior scholar with the Mercatus Center.