Political grammars of justification and cost-benefit analysis in SEC rulemaking

Abstract

We investigate how financial regulators justify rulemaking decisions on socially oriented disclosure rules through evidence-based policymaking (EBPM) mechanisms. To do so, we analyze the Securities and Exchange Commission’s (SEC) justifications within the cost-benefit analysis (CBA) it performs when promulgating the conflict minerals disclosure rule mandated by the U.S. Congress. We use a grammatical approach to analyze the SEC’s justificatory discourse wherein a grammar represents implicit rules that actors follow to be recognized as acting appropriately. We find that six key justifications comprise the SEC’s CBA discourse. These justifications reflect public, natural, and realist grammars that connect the SEC’s justifications in a way that aims to legitimize SEC decisions. Specifically, the SEC’s public grammar suggests that the Congressional mandate increases benefits to society and to market participants and increases costs to issuers. The SEC’s discretionary rulemaking, however, reflects a realist grammar that primarily justifies decreased costs to issuers. The SEC’s realist grammar is buffered by a natural grammar in which the SEC supports its justifications by mobilizing constituent comment letters regarding the rule’s costs while paying less attention to evidence consistent with the rule’s benefits. Overall, our evidence indicates regulators employ CBA, a purportedly objective, evidence-based endeavor, to justify tradeoffs between social and financial objectives when regulating social mandates, suggesting the political nature of EBPM mechanisms.