Yesterday, a federal district judge upheld the Securities and Exchange Commission's conflict minerals rule, which had been challenged on Administrative Procedure Act and constitutional grounds. In doing so, the court called into question the scope of the SEC's statutory cost-benefit requirement. This decision serves, therefore, as another call to revise and strengthen the regulatory analysis requirements applicable to the SEC and other financial regulators.
Distinguishing the conflict minerals rule from discretionary SEC rules that were struck down for shoddy economic analysis, the court pointed to the Dodd-Frank directive that the SEC adopt the conflict minerals rule. Although the court did not believe that the SEC had to do cost-benefit analysis for this particular rule given that Congress--not the SEC--made the public interest finding for this rule, the court signed off on the SEC's analysis. The court reasoned that the SEC's consideration of efficiency, competition, and capital formation sufficed; "to suggest that the [Securities] Exchange Act mandates that the SEC conduct some sort of broader, wide-ranging benefit analysis simply reads too much into this statutory language." The need to assess benefits, according to the court, is particularly weak when--as here--a rule's benefits are supposed to be humanitarian.
The conflict minerals rulemaking was an unfortunate piece of Dodd-Frank. Unrelated to the financial crisis, the conflicts mineral rule imposes heavy costs directly on nonfinancial corporations. The decision to use the SEC rulebook to conduct foreign policy is troubling. Even more disturbing is the possibility that the new regime is harmful to the people it is supposed to help, a possibility to which the SEC did not give much thought. SEC Commissioner Troy Paredes lamented this "analytical gap" when the SEC adopted the rule:
The SEC's conflict minerals rulemaking suffers from an analytical gap that I cannot overlook - namely, there is a failure to assess whether and, if so, the extent to which the final rule will in fact advance its humanitarian goal as opposed to unintentionally making matters worse. Indeed, based on some of the comment that the Commission has received, there is reason to worry that, contrary to the aims of Section 1502, a chief consequence of the final rule could be that it actually worsens conditions in the [Democratic Republic of the Congo].
Yesterday's opinion gives the green light to the SEC to continue to cut corners on its economic analysis in ways that are not consistent with its statutory mandates. But the decision is also a timely reminder to Congress that the SEC's mandate to consider the costs and benefits of its rules could and should be strengthened to provide the agency with an indisputable directive to conduct thorough, well-grounded regulatory analysis. In carefully crafting such a requirement, Congress would not be punishing the SEC, but providing it with a framework for helping the agency, Congress and the public to understand the purpose of its rules and their likely effects.