The next target for Dodd-Frank haters: SEC ‘conflict minerals’ rule
On Friday, U.S. District Judge Robert Wilkins of Washington struck down the Commodity Futures Trading Commission’s 2011 rule setting position limits on derivatives tied to certain physical commodities. The judge found that the CFTC had misinterpreted the Dodd-Frank financial reform law of 2010 when it wrongly concluded that Dodd-Frank required it to impose position limits in order to curb speculative trading. Instead, according to Wilkins, the CFTC should have looked back to the Commodity Exchange Act of 1936 and determined whether such limits are necessary and appropriate before setting them. The judge sent the rule back to the CFTC for reconsideration.
Though CFTC Chairman Gary Gensler told Reuters in a statement issued Friday that he continues to believe position limits are not only necessary but mandated by Congress, Wilkins’s ruling marks the second time in 14 months that industry groups have succeeded in rolling back agency rules required by Dodd-Frank. In July 2011, a three-judge panel of the District of Columbia Circuit Court of Appeals found that the Securities and Exchange Commission had not properly considered the impact on capital markets when it promulgated the Dodd-Frank-mandated “proxy access” rule, which required public companies to provide shareholders with information about shareholder-nominated board candidates. The D.C. Circuit struck down the rule, and the SEC decided not to appeal. That case was brought by the Business Roundtable and the U.S. Chamber of Commerce. The challenge to the CFTC’s position limits rule was brought by the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association. The industry groups in both cases were represented by Eugene Scalia of Gibson, Dunn & Crutcher, who is certainly living up to his reputation as the scourge of federal agency rulemakers.
The specific flaws courts cited in the proxy access and swaps limit rules are different, but there’s a unifying sentiment behind the rulings that struck them down: Agencies cannot point to Dodd-Frank mandates, cite the financial crisis and impose new rules without exercising independent judgment about the need for and the impact of those rules.
The next Dodd-Frank regulation to be scrutinized under that standard is likely to be the conflict minerals rule that the SEC adopted in August, six months late and after vocal opposition from industry groups. In a 3-to-2 vote, the commission enacted a rule requiring public companies whose products contain materials that originated in the Democratic Republic of the Congo or neighboring countries to submit annual reports describing their due diligence on “the conflict minerals’ source and chain of custody.” Opponents of the rule complained (among other things) that it places undue reporting burdens on small companies; the two dissenting commissioners (who are both Republican appointees) questioned whether the SEC should be straying from its core mission and venturing into foreign policy.
Though the SEC heeded the lesson of the proxy access litigation and took care to consider the market impact of the conflict minerals rule — it said the cost across the spectrum of companies affected by the regulation could be $3 billion to $4 billion initially and then about $200 million to $600 million a year — Steven Engel of Dechert told me that the SEC’s analysis can’t resolve a fundamental disconnect between the intent of the regulation and the SEC’s core interest in protecting capital markets. “This is a situation where the commission was charged with pursuing a rule that is arguably in conflict with its mission,” said Engel, who represented the Investment Company Institute and the Independent Directors Council as amici in the proxy access appeal at the D.C. Circuit. “Congress is requiring the SEC to regulate something it never regulated before.”
Engel and another Washington regulatory lawyer told me there’s been buzz about a challenge to the conflict minerals rule, and that Wilkins’s decision in the CFTC position limits case increases the odds that business groups will file suit. (SIFMA declined comment, and I didn’t get an answer from the U.S. Chamber.) The SEC’s recently passed extraction-issuer rule, which requires U.S.-listed oil, gas and minerals companies to disclose all payments of more than $100,000 to foreign governments, could also be the target of litigation asserting the rule has only a tenuous connection to the SEC’s mission.
It’s notable, Engel said, that both new SEC rules, passed on the same day in August, divided the commission. (The extraction payments rule passed by a 2-to-1 vote, with two commissioners recused.) When there is dissent among commissioners, as there also was at the CFTC on position limits, rule challengers have a road map, Engel said.
Interestingly, the controversial Dodd-Frank whistle-blower provisions seem to have escaped a broad challenge, though trial courts (as I’ve reported) are still figuring out the interplay between Sarbanes-Oxley whistle-blower protections and the more sweeping provisions in Dodd-Frank. “I had predicted a challenge to the whistle-blower rules but we haven’t seen it,” said Reuben Guttman of Grant & Eisenhofer, who represented a group of law professors who submitted an amicus brief in support of the SEC in the proxy access litigation. “I think industry lost an opportunity there.”
The rule-by-rule Dodd-Frank challenges are in addition, of course, to the newly amplified litigation claiming that the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, both of which were established under Dodd-Frank, are an unconstitutional violation of the separation of powers doctrine. So far, major business groups have stayed out of the constitutional case, which three state attorneys general joined last month, but you can bet they’re watching it closely.