The Economic Consequences of Misreading Statutes

When Congress adopted the Dodd-Frank financial reform law, it included a number of provisions that had nothing to do with financial markets.  One of these was a requirement that oil companies and other natural resources companies to report annually to the Securities and Exchange Commission payments they make to foreign governments in connection with extracting those countries’ natural resources.  Human rights advocates viewed the SEC’s disclosure system as a convenient tool for influencing how countries use their natural resource revenues.  The statute sets a bad precedent for using the SEC to accomplish goals unrelated to its mission.  To make matters worse, the SEC’s ruleinterpreted the statute in a way that would frustrate the SEC’s mission of protecting investors, fostering fair and well-functioning markets, and facilitating capital formation.   The rule was thrown out by a federal court today.

The SEC’s rule mandated that company’s disclosures—which were required to be very granular—be publicly available.  Because the requirement applied only to companies that file with the Securities and Exchange Commission, it would—in the SEC’s words—“impose a burden on competition.”  The SEC explained that affected companies “could be put at a competitive disadvantage with respect to private companies and foreign companies that are not subject to the reporting requirements of the United States federal securities laws and therefore do not have such an obligation.”  Rules like these are costly to companies and consequently serve as a disincentive for companies to list in the United States.  Moreover, because some countries prohibit public disclosure of the sort the rule required, the SEC acknowledged that companies “may have to choose between ceasing operations in certain countries or breaching local law, or the country’s laws may have the effect of preventing them from participating in future projects.”  Not a great choice.

The SEC was sued for, among other things, interpreting the rule in a manner that was a lot more damaging to companies than Congress intended.  The court agreed and threw the rule out.  The court faulted the SEC for reading the statute to require that company’s filings be made available to the public, when it plainly did not contain such a requirement.  Moreover, the SEC “abdicated its statutory responsibility to investors” by failing to even consider whether an exemption from the rule would be appropriate for payments in countries that prohibit disclosure.

The SEC’s unwillingness to exercise discretion afforded to it by Congress is just one example of how a regulatory agency’s actions can have real effects on the competitiveness of American companies and the returns to investors in those companies.