The Role of Academic Research in SEC Rulemaking: Evidence from Business Roundtable v. SEC

To shed light on the role that academic research plays in the Securities and Exchange Commission’s (SEC) rulemaking, we examine the SEC’s patterns of consumption of academic research from 2007 through 2017. We show how the Business Roundtable v. SEC ruling in 2011 increased consideration given to academic research during SEC rulemaking. We find in our paper that after the ruling, the SEC cites more papers in its proposed rules and, in particular, more papers that illustrate the costs of regulation. This change in academic citations results in fewer negative comment letters on proposed SEC regulations. We survey academics whose research was cited by the SEC, and the majority respond that the SEC’s description of their work is completely or mostly accurate. When we survey general academics, their average rating of the SEC’s accuracy is lower, although the rating improves regarding specific SEC quotes citing academic research. Although there is still room for a more substantive discussion of research, having a higher standard of cost-benefit analysis leads to a more balanced discussion of academic research.

Many other fields use research in the design of regulation, with the belief that doing so will lead to better regulation. Congress has unsuccessfully tried various times to increase cost-benefit analysis at the SEC, with bills such as the SEC Regulatory Accountability Act, the Independent Agency Regulatory Analysis Act, and the Regulatory Accountability Act. The struggle to increase cost-benefit analysis may relate to the potential challenges with the use of academic research from accounting and finance in the design of regulation. It is unclear if disclosure and financial market research provide useful and relevant information to policymakers, considering the lack of granular data, the difficulty in drawing causal inferences, and potential biases in conducting and publishing research (Coates 2015; Leuz 2018).

Despite the ambiguity of the importance of cost-benefit analysis, the SEC includes academic research as part of its discussion of the economic costs and benefits of proposed rule changes. We document that the SEC primarily cites papers published in highly ranked journals, such as Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and Journal of Accounting and Economics, or working papers. Of the working papers the agency cited during our sample period, at least 42% were later published in peer-reviewed journals.

We focus on the court’s decision in Business Roundtable v. SEC to strike down the proxy-access rule, which was promulgated by the SEC pursuant to the Dodd-Frank Act (2010), because of its insufficient cost-benefit analysis connected to its creation. We find the use of academic research increased after the rule was struck down. According to the law literature, this court case represents an important change in precedent leading to a new higher standard in the discussion of academic research found in SEC rules (Kraus and Raso 2013; Coates 2015; Nagy 2015). This change in precedent creates interesting variation to examine the effects of increased consumption of academic research in the regulatory process.

We examine 176 proposed and 181 final rule documents released from 2007 to 2017, and we hand-collect 879 unique academic papers cited in these documents. We examine each citation to classify it as either being used to highlight a potential benefit (discredit a cost), to highlight a potential cost (discredit a benefit), or to simply provide facts or statistics related to the background of the regulation without directly explaining the costs or benefits of the regulation. We find that the SEC cites more papers that highlight potential costs of regulation after the Business Roundtable v. SEC ruling, particularly in proposed rules. We find that, before the decision, the SEC rarely mentioned research that disagreed with a proposed regulation.

By analyzing 18,806 comment letters received on 105 proposed regulations from 2008 to 2016, we find that in the post-Business Roundtable period, the percentage of comment letters that oppose the regulation decreases as the number of academic citations and the percentage of papers discussing the cost side of the regulation increase. These results align with the public interest theory of lobbying being the dominant driver in our setting. However, combined with the finding of an increase in cost citations in the post-period, these results can suggest that even regulators primarily acting as predicted under public interest theory can conduct biased or incomplete information searches without a system standardizing the use of the academic literature. 

Rachel Geoffroy is an Assistant Professor at Ohio State University.

Heemin Lee is an Assistant Professor at Baruch College.