Trade Associations' Reply Brief to U.S. Court of Appeals for D.C. Circuit Regarding Review of SEC Rule 13q-1
Commentary by Bob Zwirb
A coalition of four trade associations (American Petroleum Institute, Independent Petroleum Association of America, U.S. Chamber of Commerce, and National Foreign Trade Council) has submitted a Reply Brief to the U.S. Court of Appeals for the D.C. Circuit in support of its petition for review of SEC Rule 13q-1, which requires resource extraction issuers to annually disclose payments made to a foreign government in connection with the issuer's commercial development of oil, natural gas or minerals. The rule, known as the SEC's "extraction rule," was adopted on August 22, 2012 by a 2-1 vote. The rule was promulgated pursuant to Section 1504 of the Dodd-Frank Act, which added Section 13(q) to the Securities Exchange Act of 1934, which requires the SEC to issue rules requiring resource extraction issuers to disclose information relating to payments concerning foreign energy investments. The coalition also challenged the rule in federal district court.
The Reply Brief argues that the SEC's action violates the First Amendment, the Administrative Procedure Act ("APA"), and the Exchange Act of 1934 by "compel[ling] speech so that its content will influence political affairs," and by basing its rule on a "flawed assessment "of its costs and benefits."
Commentary
The SEC and CFTC's Dodd-Frank rulemakings have spawned a number of legal challenges focusing on the adequacy of each agency's analysis of such rules' costs and benefits. In crafting such rules, the SEC is duty-bound to "consider" effects on investors and on efficiency, competition, and capital formation. Likewise, the CFTC is required to "consider" the costs and benefits of a rule in light of a number of considerations, including efficiency, competitiveness, and financial integrity.
Generally, there are two types of challenges with respect to this issue. The first type focuses on an agency's flawed methodology and/or its failure to consider opposing evidence. Examples of the first type include Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), where the D.C. Circuit meticulously dissected the SEC's cost/benefit analysis in support of its proxy access rule and found that the SEC had "opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters." The second type focuses on an agency's abdication of its duty to consider costs and benefits. An example of the second type would be ISDA SIFMA v. CFTC (D.D.C. 2012), where the CFTC, according to the court, argued "the unwavering position that Congress mandated the agency to set position limits and stripped it of all discretion not to impose limits."
The challenge here is primarily of the second variety, i.e., that the SEC failed to consider the costs and benefits of its extraction rule because it believed that Congress mandated it regardless of the economic consequences. Thus, the petitioners argue that the SEC "construct[ed] a flawed statutory interpretation under which it was compelled to adopt the Rule it did, despite the Rule's costs and uncertain benefits. . . . The Commission here failed to engage in that assessment when, ignorant of its Rule's benefits, it effectively treated benefits as infinite - whereupon it was prepared to impose infinite costs." The SEC's argument, thus, echoes that of the CFTC in the position limit case, i.e., that it did not need to analyze the economic evidence relating to its position limit rule because it did "not have the discretion to alter an express mandate from Congress."
Here are some of the highlights of the petitioner's Reply Brief:
"The Commission suggests that when Congress requires regulation, the agency must pursue the intended benefit no matter what the expense. But it is axiomatic that 'no legislation pursues its purposes at all costs.' Rodriguez v. United States, 480 U.S. 522, 525-26 (1987). The Commission therefore attacks a straw man when it claims to have 'faithfully' refused to 'second-guess' Congress's regulatory decision. To determine how to implement Section 13(q) while respecting Congress's other statutory commands, the Commission needed a clear understanding of the benefits that would result from its action. Congress's 'specific determination' that transparency was beneficial did not constitute a "specific determination" of the type or extent of transparency needed, or the amount of benefit it would produce. . . .
"The Commission claims that it 'satisf[ied] th[e] requirement' to consider the Rule's effects on efficiency, competition, and capital formation because it provided 'estimates' of costs and concluded that benefits were undeterminable. But economic analysis is not simply a mathematical exercise; the Commission's duty to 'consider' effects on investors and on efficiency, competition, and capital formation was an obligation to take them into account in crafting the Rule. The Ahab-like pursuit of a single objective regardless of economic effects is the opposite of 'considering' economic effects. As for the Commission's responsibility not to impose a burden on competition 'not necessary or appropriate in furtherance of the purposes of this chapter,' 15 U.S.C. § 78w(a)(2), the Commission consigns it to a footnote."
An interesting side note to this controversy is the role of Better Markets, a pro-regulatory advocacy organization that argues that "the Exchange Act does not obligate the Commission to conduct any cost-benefit analysis," thus perpetuating that organization's positive role in the regulatory process by fostering "better" regulation devoid of any empirical support.
View Petition for Review of Final Rule of the U.S. SEC.