Jim Hamilton has a detailed description of the newly adopted SEC conflict disclosure rules. As you;ll see, the rules go way beyond mere disclosure. they require considerable (and costly) audits, due diligence, and documentation.
The always perspicacious Commissioner Troy Paredes dissented, arguing that:
Although the Commission finds itself in a difficult position by having to undertake a rulemaking that falls far outside its zone of expertise, the agency still must base its final rule on a reasoned assessment that considers the potential consequences of its judgments. Otherwise, one cannot determine whether the rule is likely to do more good than harm.
Regrettably, notwithstanding the time that has been taken, the effort that has been expended, and the comment that has been received, the Commission has not met its obligation in this respect. 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 DRC.
His explanation as to why that is the case is a must read.
In reading Commissioner Parede's cogent critique, I was struck by the language he choise to deploy. In particular, consider this line from his dissent:
... the adopting release acknowledges that the Commission did not assess how effective the final rule will be in addressing the crisis in the DRC. As the Commission’s adopting release explains, Section 1502 “aims to achieve compelling social benefits, which we are unable to readily quantify with any precision, both because we do not have the data to quantify the benefits and because we are not able to assess how effective Section 1502 will be in achieving those benefits.”
In other words, the Commission has declined to analyze whether the choices it has made will advance the rulemaking’s objective.
Why is that so striking? Let's revisit Business Roundtable v. SEC, 647 F.3d 1144 (DC Cir. 2011), in which the court struck down SEC Rule 14a-11, the so-called proxy access rule, which required "public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for the board of directors." The court did so "because, among other reasons, the Commission failed adequately to consider the rule's effect upon efficiency, competition, and capital formation."
If a rule is struck down when the SEC considers the rule's effect, but fails to do so "adequately," how much more should the rule be struck down when the SEC "did not assess" the rule's effect at all or, perhaps even worse, "declined to analyze" the rule's effect? After all, Business Roundtable teaches that the SEC has a "statutory obligation to assess the economic consequences of its rule."
If somebody challenges the validity of the Rule, I expect they will be citing Commissioner Paredes' critique early and often.
