SBA Office of Advocacy Criticizes SEC Conflict Minerals Rulemaking

Here's something that doesn't happen every day: one federal government agency arguing that another federal goverment agency isn't complying with the law.

Last December, the SEC proposed rules to implement section 1502 of the Dodd-Frank Act. Section 1502 adds a new subsection 13(p) to the Securities Exchange Act; that section requires the SEC to adopt regulations requiring disclosure about so-called "conflict minerals" originating in the Democratic Republic of the Congo or adjoining countries. The Commission has yet to take action on the proposed rules.

On Tuesday, the Office of Advocacy of the Small Business Administration submitted this letter arguing that the proposed rule fails to comply with the Regulatory Flexibility Act. The Regulatory Flexibility Act requires proposed rules to include an initial regulatory flexibility analysis that includes, among other things: (1) a description and the estimated number of regulated small entities, and (2) a description and an estimate of the compliance requirements, broken down by different categories of small entities, if there will be any differential effects. The Office of Advocacy contends that the SEC has significantly underestimated both the cost of the proposed rule and the number of small businesses that will be affected. The SEC's proposal indicated that compliance costs "are likely insignificant," but the Office of Advocacy's letter quotes small business sources claiming that median compliance costs could be $65,000 or $170,000.

Administrative agencies often underestimate the cost of their proposed rules, but the SEC is still stinging from its recent loss in the Business Roundtable case. In that case, the D.C. Circuit held that the SEC’s adoption of its proxy access rule violated the Administrative Procedure Act because the SEC “inconsistently and 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." That decision follows on the heels of several other recent losses in the D.C. Circuit, some of which were also based on the SEC's failure to adequately consider the cost of its rules.

If the conflict minerals rule is challenged, it certainly won't help the SEC's case to have another federal agency arguing the plaintiff's case.

-Steve Bradford