Late last week a seldom heard voice echoed throughout the regulatory reform debate forum when the U.S. Department of State openly stood behind the controversial Securities and Exchange Commission (SEC) ‘Resource Extraction Rule.’ This rule, developed as part of the continuing cavalcade of Dodd-Frank initiatives, went into effect last August with the goal of requiring disclosure of payments made by U.S. corporations to foreign governments in pursuit of foreign resource extraction. State Department administrators reiterated Secretary of State Hillary Rodham Clinton’s position that transparency is vital to fighting international corruption. The State Department believes this rule directly aligns with U.S. foreign policy regarding foreign corruption.
Despite the State Department’s lofty ambitions for the new regulation, this rule has become the latest legal flash-point in the debate over increasing regulatory red tape. The American Action Forum’s review of 2012 found that the economy endured nearly 87 million burden hours of paperwork in 2012. The regulatory impact of 2012 is just one piece of the $518 billion expansion of regulation during the Obama Administration. With these staggering numbers continuing to grow, private industry groups have begun to challenge the cost-benefit analysis offered by the SEC and other regulatory agencies in their rule assessments.
The Resource Extraction Rule fight is the latest example of this new trend in regulatory challenges. The U.S. Chamber of Commerce, the U.S. Petroleum Institute, and two other industry groups have filed suit in the Federal District court in Washington, D.C. The challenge avers that the rule’s proffered cost-benefit analysis is inadequate. While courts have generally given deferential treatment to regulatory agencies in their rule-making capacity, this new direction has proven successful for private sector legal challenges to rules associated with Dodd-Frank. Questioning the cost-benefit analysis provided helped plaintiffs negate SEC’s Proxy Rule last year in Business Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011).
At the helm of this latest legal challenge once again is Eugene Scalia (yes, son of Justice Scalia) who won Business Roundtable, as well as a similar suit against the Commodities Futures Trading Commission. With veteran leadership at the Plaintiff’s table, the SEC must find a way to stand by its calculations, and the numbers are huge. Steven A. Engel and Katherine M. Wyman of Decherrt LLP have examined the analysis conducted by SEC for this rule. The cost-benefit analysis for this rule estimates at least $1 billion in start-up costs, with recurring annual costs of $400 million. Despite these unsettling figures, SEC defined the benefits as “not readily quantifiable” because the social benefits are outside the norm of assessment for SEC regulation. Lacking more in-depth analysis of the benefits, SEC does acknowledge that the rule may have a directly adverse impact on U.S. private sector competition with foreign entities that are not subject to similar domestic reporting requirements.
It appears that the State Department has thrown its weight behind SEC to garner some clout for their defense as the agency heads into court yet again. However, State Department support may not be enough to turn off the spotlight that has begun to shine brightly over the shadowy world of regulatory agency cost-benefit analysis. A proper understanding of a rule’s impact on the U.S. economy cannot be discounted and should be a vital part of any assessment of the rule’s importance, regardless of whether the State Department feels that it has use for the regulation or not.