The SEC, Social Benefit Rules, and the Inapplicability of Cost-Benefit Analysis: The Legal Challenge to Rule 13q-1 (Part 4)

The conceptual problem is that the SEC is charged with analyzing rules for the impact on efficiency, competition, and capital formation.  This for the most part means the costs imposed on, and the benefits received by, the market.  In the resource extraction context, this type of cost-benefit analysis will lead to useless results. 

The benefits of the rule have little to do with capital markets.  Even if the benefits could be quantified, which the SEC says they cannot, there is no logical reason why these benefits should be offset against only the costs imposed on the capital markets.  In other words the “cost-benefit” analysis for Rule 13q-1 is mixing apples (benefits to the citizens of countries with resource extraction industries) with oranges (the costs to the US capital markets).  One possibility would be to analyze the rule solely for its impact on the capital markets.  Yet doing so ignores the purpose of the provision and the intent of Congress. 

The reality is that the use of a cost-benefit analysis in this case is inappropriate.  This can be seen from the provision that requires a cost-benefit analysis.  Section 3(f) of the Exchange Act does instruct the Commission to consider the impact of rules on efficiency, competition and capital formation.  But this ignores the prefatory language in the provision.  The Commission only must do so for rulemaking when “required to consider or determine whether an action is necessary or appropriate in the public interest.”  In other words, the public is benefited from a consideration of the impact of a rule on “efficiency, competition and capital formation.”

Section 13(q) requires rulemaking but does not require the Commission to act in the public interest.  The provision for the most part provides no discretion.  As Section 13(q)(2) states: 

Not later than 270 days after the date of enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commission shall issue final rules that require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals.

Moreover, in setting out the requirements for the rule, Congress was specific and imposed no obligation to factor in the public interest.  The absence can also be seen from the one instance where Congress, in fact, required consideration of the public interest.  Section 13(q)(2)(D)(ii)(VII) instructed the Commission to consider the public interest when determining other information to be tagged electronically.  In other words, had the rule more broadly been subject to review under a public interest standard, Congress would have said so.  Having failed to do so, the mandatory cost-benefit analysis in Section 3(f) is not triggered.

So the SEC was not required to engage in a cost-benefit analysis when adopting the mineral extraction rule.  Said another way, it was not required to consider the impact on efficiency, competition and capital formation.  And, in fact, this is what the Commission really did.  It did not compute benefits but merely sought to assess the costs.  Was this an appropriate approach?  Case law suggests that it was. 

In Entergy Corp. v. Riverkeeper, Inc., 556 US 208 (2009), the Court had to address a decision by the EPA to apply a cost-benefit analysis in the context of certain rules addressing the discharge of effluents into the country’s waters under the Clean Water Act.  In providing rulemaking authority, Congress did not mandate cost benefit analysis or insist on the consideration of the public interest.  Instead, Congress instructed the EPA to adopt rules that resulted in the application of the “best technology.” 

The lower court (in a decision written by then Judge Sotomayor) found that the language precluded a cost-benefit analysis.  See Riverkeeper, Inc. v. United States EPA, 475 F.3d 83 (2d Cir. 2007) ("We conclude in any event that the language of section 316(b) itself plainly indicates that facilities must adopt the best technology available and that cost-benefit analysis cannot be justified in light of Congress's directive.").  The majority at the Supreme Court, however, concluded that the language did “not unambiguously preclude cost-benefit analysis.”  Under Chevron, therefore, the Court had to defer to any interpretation by the agency that was reasonable.

The approach in Entergy suggests that courts should take a deferential approach toward agency interpretations.  One possibility, therefore, is that Congress precluded the application of the standard in Section 3(f) by declining to tie the rule specifically to the public interest.  Another possibility, however, is that the appropriate approach on the most appropriate method of implementation is a matter to be left to the discretion of the Commission.  Accepting that a rule must be adopted that is consistent with congressional intent but assessing costs in order to minimize the impact on the capital markets is a reasonable interpretation of the requirement of Section 13(q). 

So where does this leave things?  In Dodd-Frank, Congress mandated disclosure requirements that did not have to have a nexus to the capital markets.  Without such a nexus, a cost-benefit analysis that looks to the impact of disclosure on the capital markets has no application.  It would, therefore, be inappropriate to strike this rule down because of an analysis that the SEC is not required to apply.

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.