Should SEC Be in Charge of Foreign Policy

Last week, the United States District Court for the District of Columbia ruled in SEC’s favor on the Conflict Minerals rule. The rule requires public companies to track their sources of coltan, cassiterite, wolframite, gold and derivative minerals. These so-called “conflict minerals” are often used to finance violent armed groups in the Democratic Republic of Congo (DRC). SEC ‘s rule aims to reduce funding that flows towards these armed groups. Yet despite its laudable goals, the rules will likely fail due to poor analysis:

  • The rule fails to examine the extent of the problem. The rule seeks to reduce funding for armed groups in DRC but fails to examine whether the identified minerals actually constitute a major source of funding for these groups. If they are not, targeting other sources of funding could be more effective.  Similarly, if the armed groups can easily shift to alternative funding sources (DRC is rich in minerals that are not on SEC’s list), the rule’s benefit would be rather limited.
  • The rule presents no alternatives. One can easily think of other ways to reduce armed violence in DRC, including military assistance to DRC’s government or US-led operations to disrupt arms flows into the country. It is difficult to say whether SEC’s approach is more effective when the rule presents no alternatives that its decision could be compared to.
  • The rule fails to estimate benefits. In contrast to its elaborate discussion of the rule’s costs, SEC devotes less than a page to describe the rule’s benefits (only to acknowledge that it is unable to quantify the benefits due to lack of data). While few would expect SEC to have internal expertise on armed conflicts in Africa, the agency’s failure to solicit expert opinions from external sources is inexcusable.
  • The rule makes no plans to measure its effectiveness. In light of the SEC’s admission that it lacks data to estimate the rule’s effectiveness in reducing violence in DRC, one would expect the agency to identify specific metrics to measure success and to establish plans to collect data on the rule’s progress. Yet, SEC seems uninterested in whether its rule will actually produce positive outcomes.
  • The rule makes no plans for retrospective review. Even the best-intentioned regulations can lead to unintended consequences. Given that SEC knows so little about the area that it is regulating with this rule, the chances for things to go wrong are even higher. In fact, some commenters suggested that the rule’s burdens may fall mostly on ordinary citizens and not the armed groups that the rule targets. It is possible that the rule may do more harm to ordinary Congolese than good. Since SEC makes no place to reexamine the rule, it will likely remain in place regardless of its merits.

Troublingly, the court sided with SEC, singing off on the agency’s virtually non-existent economic analysis. My colleague Hester Peirce commented last week:

Although the court did not believe that the SEC had to do cost-benefit analysis for this particular rule given that Congress–not the SEC–made the public interest finding for this rule, the court signed off on the SEC’s analysis. The court reasoned that the SEC’s consideration of efficiency, competition, and capital formation sufficed; “to suggest that the [Securities] Exchange Act mandates that the SEC conduct some sort of broader, wide-ranging benefit analysis simply reads too much into this statutory language.” The need to assess benefits, according to the court, is particularly weak when–as here–a rule’s benefits are supposed to be humanitarian.

 The court’s assertion that humanitarian benefits need not be assessed is startling. One can reasonably argue that benefits of reduced violence cannot be easily monetized. Yet, the reduction in violence can and should be measured. How else would SEC know if its rule is having any impact?

Proponents of better economic analysis are often criticized that they only care about costs. As this example demonstrates, a better analysis can lead to a better rule – the one that actually saves lives.