The SEC, Social Benefit Rules, and the Inapplicability of Cost-Benefit Analysis: The Legal Challenge to Rule 13q-1 (Part 3)
The most intriguing issue in the litigation over Rule 13q-1, the mineral extraction rule, however, relates not to the costs of the rule but to the benefits. Petitioners challenged the SEC’s decision by noting that “the Commission made no determination that the Rule would benefit investors or anyone else.” Moreover, some of the purported benefits raised by commentators (that the Rule could “’materially and substantially improve investment decision making,’”) were, according to Petitioners, “preposterous” or were little more than “passing, indeterminate observations.”
Thus, “the Commission relied on no empirical studies in support of the Rule, and did not even conclude that the Rule would actually produce the benefits commenters claimed.” This was, Petitioners asserted, “an even flimsier consideration of benefits and effects on efficiency, competition, and capital formation than the rules struck down in the Chamber of Commerce cases, American Equity, and Business Roundtable.”
The tone may not be to the SEC’s liking, but the analysis from a descriptive perspective has some merit. The SEC did not quantify the benefit provided by the rule, a usual requirement in conducting a cost-benefit analysis. Nor did the SEC claim otherwise. Instead, the SEC asserted that it did not quantify the benefit because it could not.
As the adopting release indicated, the provision was intended by Congress to provide a “social benefit [that] differ[ed] from the investor protection benefits” that SEC rules typically sought to achieve. While some commentators in the rulemaking process did assert that the disclosure would “help investors model project cash flows and assess political risk, acquisition costs, and management effectiveness,” the Commission reasoned that these “social benefits that [could not] be readily quantified with any precision” and the objectives of the rule did not “appear to be ones that [would] necessarily generate measurable, direct economic benefits to investors or issuers.”
In defending the benefit analysis, the SEC on brief made similar observations. “Empirical evidence regarding the social benefits that may result from the transparency and ‘enhanced government accountability’ that Congress intended when it enacted Section 13(q) . . . was not obtainable” and could not be quantified “’with any precision.’”
So what should one make of this argument? What role, in a cost-benefit analysis, does "social benefit" play? We will pick up the analysis in the next post.
Primary materials on the case including the briefs filed by the Petition and the SEC can be found on the DU Corporate Governance web site.