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Finding Leniency in Lindeen

By Elizabeth Greenwood*

Federal agencies must take a number of factors into account when proposing a regulation. One of those factors is whether the benefits of proposed regulation outweigh the costs.[i] For example, Executive Order 13563, signed by President Barack Obama on January 18, 2011, reinforced the requirement that regulation “must take into account benefits and costs, both quantitative and qualitative.”[ii]

The Securities and Exchange Commission, however, has an additional and particular consideration. The National Securities Markets Improvement Act of 1996 amended the Securities Exchange Act of 1934 to require the SEC consider the effect any rulemaking has on efficiency, competition, and capital formation.[iii] Specifically, the language, as it is currently in the United States Code, states:

“Whenever pursuant to this chapter the Commission is engaged in rulemaking, or in the review of a rule of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.”[iv]

This requirement restricts the rules that the SEC can pass, since the SEC must consider a broader range of factors under each rule, but also allows rules to be more tailored towards a positive economic goal.

However, the SEC has had some trouble with this regulation where there is uncertainty. A series of cases declared the SEC’s consideration of the effects of its rules on efficiency, competition, and capital formation to be arbitrary and capacious. In one instance, the court found that uncertainty, though a limitation, was not an excuse for the SEC to avoid its statutory obligation to the best of its ability.[v] In another case, the D.C. Circuit held that “the SEC cannot justify the adoption of a particular rule based solely on the assertion that the existence of a rule provides greater clarity” where there is uncertainty.[vi] A year later, the D.C. Circuit again found that “the Commission acted arbitrarily and capriciously for having failed once again . . . adequately to assess the economic effects of a new rule.”[vii]

The Commission moved to improve its economic analysis in response. After the series of embarrassing cases, a new guidance was developed and implemented in order to improve the Economic Analysis performed for SEC rulemakings.[viii] Further, the Commission’s Division of Economic and Risk Analysis has expanded significantly.[ix] The recent decision of the D.C. Circuit in Lindeen v. Securities and Exchange Commission assures the Commission that it is on the right track in improving its economic analysis.

Lindeen was a challenge by two state securities regulators of the SEC’s “Regulation A-Plus.” Under congressional mandate, Regulation A-Plus “created a new class of securities offerings freed from federal-registration requirements so long as the issuers of these securities comply with certain investor safeguards.”[x] Massachusetts and Montana challenged the regulation under several theories, one of which was that the regulation was arbitrary and capricious for failing to adequately explain how the regulation protected investors.[xi] The D.C. Circuit found in the Commission’s favor, holding that the Commission’s determination that the regulation “’may aid in detecting fraud and facilitating issuer compliance’ by providing another level of investor protection” fulfilled the statutory requirement to analyze efficiency, competition, and capital formation.[xii] Petitioners’ arguments that the Commission failed to show the regulation would actually mitigate fraud and facilitate compliance fell flat. Stating that “[w]e do not require the Commission ‘to measure the immeasurable,’” the court supported the SEC’s improved economic analysis by finding that the agency’s discussion of unquantifiable benefits was adequate for the statutory requirement to consider efficiency, competition, and capital formation.[xiii]

The Securities and Exchange Commission can take solace in knowing its efforts in improving economic analysis under its statutory obligations have not gone unnoticed by the courts.

The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

*Elizabeth Greenwood is an Associate Editor on MJEAL. She can be reached at

[i] Exec. Order No. 13,563, 76 Fed. Reg. 3821 (Jan. 18, 2011).

[ii]Id. Cost-Benefit Analysis had first been put into place by Ronald Reagan in 1981. Exec. Order No. 12,291, 46 Fed. Reg. 13,193 (Feb. 17, 1981).

[iii] National Securities Markets Improvement Act of 1996, Pub. L. No. 104–290, 110 Stat. 3416 (1996).

[iv] 15 U.S.C. §77b(b).

[v] Chamber of Commerce of U.S. v. Sec. & Exch. Comm’n, 412 F.3d 133, 144 (D.C. Cir. 2005).

[vi] Am. Equity Inv. Life Ins. Co. v. S.E.C., 613 F.3d 166, 177 (D.C. Cir. 2010).

[vii] Bus. Roundtable v. S.E.C., 647 F.3d 1144, 1148 (D.C. Cir. 2011).

[viii] See Generally Memorandum from Division of Risk, Strategy, and Financial Innovation and Office of the General Counsel to Staff of the Rulewriting Divisions and Offices (March 16, 2012) (available at

[ix] Between 2011 and 2014, the Division nearly doubled in size, see Securities and Exchange Commission, Press Release 2014-88, Chief Economist and Division of Economic and Risk Analysis Director Craig Lewis to Leave SEC (May 2, 2014) (available at

[x] Lindeen v. Sec. & Exch. Comm’n, 825 F.3d 646, 648 (D.C. Cir. 2016).

[xi] Id.

[xii] Id. at 657.

[xiii] Id. at 658.

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