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Remarks to the Small Business Capital Formation Advisory Committee

April 30, 2021

Thank you, Carla [Garrett]. I want to thank the Committee for its work as always, and in particular to thank you all for revisiting the topic of increasing access to capital for underrepresented founders and increasing opportunities for diverse investors.

Your recommendation to the Commission last August urging us to promote opportunity for diverse founders and investors was a good step forward, and I’m pleased that you are now devoting additional time to helping us think through specifically how to tailor policy changes that can achieve that goal. There’s a lot of data revealing the problems that underrepresented and marginalized communities face,[1] and a fair amount of consensus that we need to do something about it.[2] But it’s difficult to craft concrete solutions. You are doing that work, and I’m grateful. I look forward to seeing any recommendations that flow from your discussion.

As we think through these issues, the Commission needs to confront how we go about assessing the effects of our rulemaking on these communities. Are there likely to be disproportionate costs to certain segments of our population from our policymaking? How can we best ensure that the benefits of our rules will indeed flow through to these communities? If we do undertake specific policy initiatives, for instance, to increase access to capital for women- and minority-owned businesses, how do we analyze whether our policy choices will have the intended effect?

I’ve talked before about steps the Commission should take to better incorporate diversity considerations into its policymaking.[3] The first is incorporating our Office of Minority and Women Inclusion into our rulemaking process to help ensure that we’re leveraging all of our expertise on these topics. The second is incorporating into our economic analysis an assessment of the costs and benefits of our rules on different segments of the population.

On the latter point, it’s time for the Commission to formally incorporate an assessment of the distributional consequences of our rulemaking into our economic analysis. This is likely to occur at other agencies; the Office of Information and Regulatory Affairs and the Office of Management and Budget have been tasked with formulating recommendations for modernizing the regulatory review process, including “procedures that take into account the distributional consequences of regulations . . . to ensure that regulatory initiatives appropriately benefit and do not inappropriately burden disadvantaged, vulnerable, or marginalized communities.”[4]

The idea that agencies should be incorporating distributional analysis into their rulemaking is not new,[5] but it is an idea whose time has come.[6] When we look only at the overall costs and benefits of our regulation, we do a disservice to communities that have been overlooked and marginalized, and we miss opportunities to better calibrate our rulemaking to achieve the desired effects. Our Division of Economic and Risk Analysis and Office of the General Counsel should re-visit their guidance on economic analysis[7] and consider updates, including how to better capture difficult to quantify benefits of our rulemaking and, importantly, its distributional consequences. This will enable us to better implement recommendations like those being contemplated by this Committee today.

Again, I thank you for your time and expertise.

[1] See Office of the Advocate for Small Business Capital Formation Annual Report for Fiscal Year 2020 (noting with respect to capital raising that “it is clear that minorities and women are not on level playing field with obtaining funding”); see also Connor Maxwell, Darrick Hamilton, Andre M. Perry, and Danyelle Solomon, Center for American Progress, A Blueprint for Revamping the Minority Business Development Agency (July 31, 2020) (“While Black Americans make up 13 percent of the U.S. population, they own less than 2 percent of small businesses with employees. By contrast, white Americans make up 60 percent of the U.S. population but own 82 percent of small employer firms.”); Small Business Credit Survey: Report On Minority-Owned Firms, Federal Reserve Bank of Atlanta (Dec. 2019) (finding that “[s]ignificantly larger shares of minority-owned firms reported they shied away from applying for financing because they did not believe they would be approved” and “Black- and Hispanic-owned firm applicants received approval for smaller shares of the financing they sought compared to White-owned small businesses that applied for financing”).

[4] See Modernizing Regulatory Review, Memorandum for the Heads of Executive Departments and Agencies (Jan. 20, 2021).

[5] See Sally Katzen, GW Regulatory Studies Center, A Project Worth Watching at OIRA (Mar. 29, 2021) (“It is important to recognize that interest in the distributive effects of regulatory proposals is not something new. Both EO 12866 and EO 13563 speak of distributional effects. Yet it has not taken root. It has not been made operational.”).

[6] See Richard L. Revesz, Regulation and Distribution, 93 N.Y.U. L. REV. 1489 (2018) (“The time has come to make distributional consequences a core concern of the regulatory state.”).

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