The latest legal challenge to an SEC rule is underway.  The Chamber of Commerce and the American Petroleum Institute have challenged the SEC's rule governing payments by mineral extraction companies.  The complaint in the district court and the petition in the court of appeals contains a first amendment challenge.  (The action has been filed in the district court and in the court of appeals, with an emergency motion pending in the court of appeals that seeks to resolve jurisdiction). The complaint also alleges that the SEC exceeded its rulemaking authority. 

The complaint asserted that the SEC's "principal defense" of the "onerous rule" was "that it was required by law to issue the rule it adopted, under Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act."  The complaint characterized the defense as "mistaken" and argued that the SEC lacked the rulemaking authority to adopt the rule.

Section 1504 requires only that a “compilation” or aggregation of payment information made by all U.S. companies to each foreign government and the federal government be made publicly available. The Commission, however, grossly misinterpreted its statutory mandate to require that each U.S. company publicly file a report on the Commission’s online electronic database (EDGAR) detailing each payment made to each and every foreign government, for each and every “project” relating to extractive industries. And the Commission adopted this approach despite the fact that publication of a “compilation” would have served the purposes of the statute without further burdening U.S. companies or revealing trade secrets or pricing strategies to competitors.

Mostly, though, the complaint and the petition repeated the basis used by the DC courts to justify their interventionist approach with respect to agency rulemaking.  The SEC, as usual, failed to conduct an adequate cost benefit analysis. 

the Commission failed to properly consider the Rule’s effects on competition, or whether the Rule was likely to achieve its desired benefits in light of its enormous costs. Indeed, the best the Commission could muster as to the Rule’s purported benefits was that it “may result in social benefits” that “cannot be readily quantified with any precision.” 77 Fed. Reg. at 56, 398 (emphasis added).

The actual cost benefit analysis applied by the Commission was little more than "lip service." 

While the Commission paid lip service to the requirement for cost-benefit analysis and tabulated (erroneously) some of the direct costs of the Rule, it repeatedly failed to resolve critical questions that directly relate to the Rule’s effect on competition; made regulatory choices that exacerbated the competitive harm to U.S. companies and increased the burden on First Amendment rights; and flatly refused to allow any exemption from the Rule’s requirements to protect U.S. companies from the billions of dollars in competitive harm it projected.

Part of the "arbitrary" beavior was the decision not adopt certain exemptions. 

In the final Rule, the Commission arbitrarily rejected any exemption from the Rule’s disclosure requirements for projects in countries that forbid such disclosures by law. 77 Fed. Reg. at 56,368. That refusal flies in the face of principles of comity and the Restatement (Third) of Foreign Relations Law, both of which counsel against implementing a statute in a manner that causes a direct conflict with foreign law.

In the past, this would have been viewed as a long shot.  There are two things that make it a more viable challenge.  First, it was filed by Eugene Scalia.  He has an enviable track record in the DC courts with respect to challenging agency rulemaking. 

The other is a decidedly interventionist set of courts in the DC Circuit (although Scalia pointedly disagrees with this approach).  Its true that SEC rules have been invalidated by panels that include judges appointed by presidents of both parties.  But the decision in the shareholder access case was, as we have noted on this blog, not well reasoned and explained more by a dislike for shareholder access than an analysis of administrative law.  It reflected an utter lack of deference to agency process, something traditionally required under the arbitrary and capricious standard of review.  See Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. 

The same is risk is present in this case.  To the extent the judges do not like the rule (despite the congressional mandate that it be adopted), they will strike it down on the basis of an inadequate cost benefit analysis.  Since this type of analysis is not subject to definitive standards, a court can always find that it was inadequate. 

The approach has long term costs.  In addition to the consequences with respect to the particular rule, the interventionist approach of the courts discourages rulemaking in the first instance and discourages anything but the most conservative approach to rulemaking in the second. 

In many cases, this does not obviate regulation.  It merely shifts regulation from rulemaking to informal positions of the staff.  Informal positions, as we have noted, are subject to far greater swings as the political makeup of the Commission changes.  See Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors.  One set of costs simply replaces another. In short, turtles all the way down. 

We will follow the case.  The complaint is posted on the DU Corporate Governance web site.