Earlier this week, the Court of Appeals for the D.C. Circuit issued its much awaited opinion regarding the Securities and Exchange Commission's conflict minerals rule. The court ruled in the SEC's favor with respect to the challengers' Administrative Procedure Act and economic analysis claims and in the challengers' favor on their constitutional claim. The claim on which the challengers prevailed has attracted the most attention, but other parts of the opinion could also have important effects.
Addressing the violence in the Democratic Republic of the Congo (DRC) was one item on the SEC's lengthy Dodd-Frank to-do list. Many aspects of the conflict minerals provision warrant criticism, including its lack of relationship to the SEC's mission and the fact that--in the words of Mvemba Phezo Dizolele, who has experience in the DRC--it "imposes an outside solution to a problem that is best understood by the Congolese." As the rule's challengers emphasized and as the SEC acknowledged, the price tag for this potentially ill-fated attempt to fix the DRC from afar is high and its benefits are uncertain.
The court held that that a requirement that companies describe their products as not conflict free in reports to the SEC and on their websites violates the First Amendment. The SEC did not provide evidence that the requirement--essentially a forced admission of complicity in war atrocities--was narrowly tailored to achieve the government's objectives. This constitutional holding could have important implications for some other non-investor-oriented disclosure requirements, although, as concurring Judge Srinivasan pointed out, another case now before the DC Circuit soon could "undercut" the implications of this case.
The court's quick dismissal of the challenger's economic analysis concerns also could have lasting effects beyond this particular rulemaking. The rule's challengers argued that the SEC did not, as required by law, thoroughly analyze the costs and benefits of the rule and consider whether it would unduly burden competition. The court did "not see any problems with the Commission's cost-side analysis" and exempted the SEC from having to analyze the rule's benefits beyond determining that Congress intended the rule to be beneficial. According to the court, even if the rule's benefits could be measured, they would take the form of lives saved and rapes prevented and so could not be weighed against the rule's monetary compliance costs.
As did the SEC, the court simply assumes that the rule would be beneficial in the DRC as Congress hoped. Experts are not so certain that the rule is beneficial. In fact, the rule, which disrupts the local economy, could impose costs in the DRC in the form of more human suffering and violence. The SEC's failure to analyze the rule's consequences was not a display of proper deference to Congress as the court implied. Rather, it was an abdication of the SEC's responsibility to think through whether the rule will achieve the intended objectives or undermine them. As dissenting Commissioners Troy Paredes and Daniel Gallagher pointed out, the SEC has broad exemptive authority under the Exchange Act, which it could have employed to "exempt any person . . . or any class or classes of persons . . . from any provision or provisions of [the Act] or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors." Congress presumably gave the SEC this authority because it recognized that the SEC, as it dives into the details of implementation, might discover that a statutory requirement could cause more harm than good.
The precedential value of this case as it relates to the SEC's economic analysis requirements may be limited because of the atypical nature of the rule at issue. The appellate court did not adopt the district court's narrow reading of the SEC's economic analysis requirements. Nevertheless, the court's suggestion that the SEC does not have to consider benefits because Congress "conclude[d], as a general matter, that transparency and disclosure would benefit the Congo," could be applied more generally to permit the SEC to avoid thinking about the consequences of any rule that is wrapped in a congressional objective. If the court's decision serves as an excuse to avoid serious analysis of costs and benefits in the future, the SEC will deprive itself, Congress, and the public of valuable information and, as may happen with this rule, could unwittingly make a terrible situation even worse.