REGULATORY REFORM LEGISLATION

WEDNESDAY, JUNE 6, 1979

U.S. SENATE,

COMMITTEE ON GOVERNMENTAL AFFAIRS,

Washington, D.C.

The committee met, pursuant to recess, at 9:30 a.m., in room 3302, Dirksen Senate Office Building, Hon. Charles Percy presiding.

Present: Senators Percy and Durenberger.

Senator PERCY. The hearings on regulatory reform will please come to order.

Mr. Williams is our first witness. For the benefit of our other witnesses, Mr. William Eberle, from the Committee on Economic Development, has to catch an airplane and will be called second. Mr. Frank Beal and Mr. Robert Wilmouth will be next. I am giving a speech at 12:30 on regulatory reform, so we will certainly want to move these hearings along, knowing we will be delayed, obviously, beyond a little after noon. I would like to ask each of our witnesses to confine their opening statements to 10 minutes so that we will have adequate time for questioning. The entire statement will be incorporated in the record, of course.

Mr. Williams, the committee is honored to have you with us. today. I think you probably know, having sponsored the Regulatory Reform Act last year along with my principal cosponsor is Senator Robert Byrd, Senator Ribicoff, and others, that I have always tried to allay concerns that regulatory reform is an attempt to sunset and remove all Government regulation. I have used SEC as one of those examples, along with the Federal Deposit Insurance Corporation.

My father was a small-town banker. His bank failed, without insurance. I think the Federal deposit insurance has saved the banking profession, strengthened it, avoided bank runs. Who would ever do without that?

Having headed a publicly held corporation for 18 years, having filed all of those years-is it still a 10-K that is filed?

Mr. WILLIAMS. Yes.

Senator PERCY. I can't imagine having an orderly, competitive securities industry, protecting the public interest and yet keeping needed competitive forces operating, without SEC.

On the other hand, we have all seen that we can reform our practices, upgrade and modernize them, have more faith in the free market. Sometimes some of those being regulated say on the one hand, "Let's get rid of Government regulation," on the other hand, "Don't put the competitive forces to work on our business because that will destroy us." SEC has moved with great dispatch in that

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area. I think it has improved markets and helped the customer a great deal.

I think SEC has accomplished a great deal of its own reform already.

We hope our legislation, as with the airlines, will just stimulate and reinforce the marketplace. Many of us in Congress feel that we don't want the dead hand of regulation. We don't want regulation based on premises of the past. What we want is regulation based on protecting future interests and taking into account the changing nature of our economy and our society.

With that opening statement, we welcome you and our other witnesses today. We appreciate your testimony now.

TESTIMONY OF HAROLD M. WILLIAMS, CHAIRMAN,

SECURITIES AND EXCHANGE COMMISSION

Mr. WILLIAMS. Thank you, Mr. Chairman. Thank you for your very generous and supportive comments about the Commission. They serve as an appropriate introduction for my comments. To the extent that the Commission has a problem with the proposed legislation, that problem lies in the impact of the bill and the processes it would require on the dynamics of the Commission in operation.

It is a question of how this kind of legislation would bring about the kinds of attitudes and developments it is intended to accomplish.

In the interest of holding my remarks to 10 minutes, I will just hit some high spots of my prepared testimony. I would begin by emphasizing that I personally, and the Commission as well, fully support the broad goals of regulatory reform.

I think we need to look essentially at two issues here. One, which the legislation addresses, is the question of regulatory activity in individual agencies and the specific regulations promulgated by those agencies.

The second is, that I think a large part of the concern that is articulated by the business community, and probably by society at large, relates not so much to the impact of any single rule, or the activity of any single agency, as it does to the question of whether society as a whole, which pays for this process, as well as being its beneficiary, can afford the aggregate costs of the benefits received. The question is whether, and how, we can develop a process that will surface, identify, deal with, and make conscious judgments about all these costs and benefits, and tell us what our society can afford. That is a much more complex process even than the one we are talking about here. But I think that posing the issue in that way would better focus the concern of the public. And I think that is really the message of concern we are hearing from the Congress. I am not sure that the kind of regulatory process suggested by the proposed legislation deals with this second issue.

In principle, we recognize and are concerned about regulation, about the cost of regulation and about the need to identify as best we can the benefits and burdens of our regulations and to tailor their responsibility to the specific requirements of the situation. We attached to our formal statement a detailed memorandum which our General Counsel prepared for the U.S. Regulatory Coun

cil listing a number of efforts that the Commission has to balance its use of direct regulatory authority against private sector selfregulatory initiatives in the interest of offering investors the best protection. We have made these efforts while at the same time, at this point, reducing our total authorized staff to a level below where it was in 1975.

As we look at the concept of statutory regulatory reform, we need to be concerned that every procedural requirement which Congress imposes, without a corresponding increase in resources, can actually dilute our ability to carry out the substantive responsibilities we have been charged with. By the same token, if we do tend to grow, we begin to take on more of the problems of large bureaucracies, which, thus far, we by and large have been able to avoid.

What this leads us to is a sense that the public and the agencies will probably be better served if Congress did not seek to impose general solutions to problems which in many ways are agency specific; that perhaps part of the answer lies in the role of the oversight committees who are in the best position to evaluate necessary changes in regulatory processes in individual agencies, and possibly special studies on specific agencies which this committee or others might authorize in order to generate legislative solutions on an agency-by-agency basis.

Having said this, I will turn to the specifics of the proposed legislation. We have included a section-by-section analysis of the proposal in our formal comment. We might note that there are some very positive aspects of the bills that we do support. Those are referred to on pages 5 and 6 of my prepared testimony and at length in the section-by-section comments. I might also note that we do not object to the more summary elements of the regulatory analyses requirements. Those would seem to make a great deal of

sense.

But, the requirement that the agencies prepare an initial and then a final regulatory analysis would, we believe, impose unreasonable burdens, at least on the SEC, with little, if any, benefit to the public or the regulated community. First, the requirement that such an analysis be done at the rule proposal stage, from the Commission's standpoint, ignores the importance of the comment process in gathering information for the agency. Typically, we expect that in the comment process we will gain a tremendous amount of insight enabling us to better deal with where the appropriate regulatory line should be drawn.

Second, cost-benefit analyzes, which conceptually I think we all support, unfortunately at this point is much more of a buzz word than it is a reality. I would like to see it more of a reality than it is. I devoted 7 years of my life before I came to Washington in management education. I know the technology. The methodologies are limited in their capability. There are those who say it just isn't doable, that methodologies cannot be developed. I would like to see us encourage experimentation and develop them. We can do a better job even if we only go so far as to look at total costs. It might cause us to address some of these issues a little differently than we do now.

I would think quantitatively at least that we can deal with certain costs, and we can deal with certain benefits. But if the question is what is deliverable, my concern is that we will just cause a lot of paperwork and a lot of activity that in many ways will be form rather than substance. It will serve to depreciate the credibility of the process. The bills make it clear that we are not talking about quantification in terms of dollars, in at least the section-by-section analysis, but the actual statutory language is somewhat ambiguous and could be clarified.

The third point that concerns us is that, despite the efforts of the draftsman, judicial review would in fact occur. Professor Gellhorn's comments in the current issue of Regulation magazine are as follows, and I quote from the bottom of page 9 of my prepared testimony, "regardless of what the bills say, judicial review will somehow be made available. The only question is whether this fact is recognized now or after numerous appeals and several years of uncertainty." I would have to agree with Professor Gellhorn's opinion. We do suggest in our testimony several ways in which the process might be at least preserved and perhaps enhanced and still some more distance put between the regulatory analysis and judicial review. I think those are contained on pages 10 and 11 of my testimony.

As to the provisions in S. 262 and S. 755 on systematic review of reporting on agency rules, our preference is for the proposal set forth in S. 262 which we feel would be less burdensome and would permit the agency, or in a sense require the agency, to use somewhat more judgment in terms of best application of its resources. The bills make significant improvements in treatment of ex parte communications in formal hearings. We would consider those changes quite desirable.

There is a broader problem concerning ex parte communications which should be addressed. This is described on page 13 of my testimony. What it amounts to specifically is that since the Administrative Procedures Act at this point does not expressly prohibit or allow ex parte communications in informal rulemaking proceedings, which are really more quasi-legislative than they are quasijudicial, there has been a considerable amount of judicial controversy on that issue. We believe that it is reasonable and appropriate to allow ex parte communications in quasi-legislative proceedings. We would urge that that matter be clarified and changes be made to the APA.

In conclusion, I again stress our commitment to improving our efficiency and removing undue burdens on those within our jurisdiction. I might say that in many cases, what is an undue burden is in the eyes of the beholder. Unfortunately, it is possible that these bills in their present forms might have, in some instances, the opposite effect than what was intended. Indeed, to the extent that rulemaking is burdened with new requirements, agencies may be more likely to proceed through ad hoc adjudication based on past conduct rather than providing advance guidance by the issuance of rules of general applicability. If not revised, these bills could lead to more paperwork and larger agency budgets. At least as the Commission looks at it, these costs, would not be outweighed by the resulting benefits.

Senator PERCY. Thank you, Chairman Williams, very much indeed. For your own information, and that of all other witnesses, if you would like to just give a brief response to any question and amplify or expand on it later in the next couple of weeks, we will keep the record open for that purpose.

Mr. WILLIAMS. Thank you.

[The prepared statement with attachment of Mr. Williams follows:]