The two recent federal court decisions on Obamacare subsidies — one for, one against — prompted fevered reactions and discussion. By contrast, two recent rulings against the Dodd-Frank Wall Street Reform and Consumer Protection Act — which is about the same length as Obamacare (around 2,600 pages) and which was rammed through the same Democrat-controlled Congress — attracted much less notice. Why? It may have something to do with the particular provisions involved.
Dodd-Frank’s Section 1502, for example, does not contain much of the terminology one would expect in a “Wall Street reform” bill. There is no mention of banking, lending, or financial fraud. Instead, one finds references to things such as “minerals necessary to the functionality or production of a product manufactured.” Minerals, manufacturing, “functionality” — in a banking bill? At least in Obamacare, no one has found any hidden provisions on foreign policy, international trade, or energy policy.
In the more than four years since Dodd-Frank became law, Fannie Mae and Freddie Mac — significant players if not the largest culprits in the mortgage crisis — are bigger than ever. The law did not lay a hand on them. And Dodd-Frank didn’t curb the power of too-big-to-fail banks. In fact, the law’s designation of “systemically important financial institutions” enshrines too-big-to-fail by telling creditors which financial firms the government will spare from a normal bankruptcy. But some parts of Dodd-Frank simply have no relationship to financial stability.
As Mercatus Center scholars Hester Peirce and James Broughel explain in their recent book on Dodd-Frank, the law’s “miscellaneous provisions” in Title XV offer “a clear example of how a statute invoked as the answer to the financial crisis is, in reality, an odd conglomeration of responses to issues, many of which had nothing to do with the financial crisis.” Section 1502, championed by celebrities such as Ashley Judd and Ben Affleck, requires all types of publicly traded firms to disclose their use of five “conflict minerals” — including gold, tin, and tungsten — sourced from war-torn regions of the Congo. Similarly irrelevant to finance is Section 1504, added at the behest of rock-star-turned-activist Bono. With the stated aim of combating the use of “dirty money” by U.S. energy companies, it requires firms developing oil, gas, or minerals to disclose payments they make to foreign governments to further their development activities.
Fighting corruption and violence in the Congo is a laudable goal, but pursuing foreign-policy objectives through a financial bill is the wrong approach. The government entity charged with enforcing these provisions, for instance, is neither the State Department nor the Defense Department, but rather the Securities and Exchange Commission (SEC) — an agency no one would describe as well schooled in the nuances of foreign policy.
Further, the required disclosures will be made in the same annual reports where companies disclose financial information to investors. This mission creep imposed on the SEC could impair its efforts to protect U.S. investors from financial fraud. As Peirce and Broughel warn, “Title XV not only fails to address any issues that arose during the crisis, but it also distracts the SEC from undertaking reforms designed to prevent future crises.”
Now, about those court rulings. Both sections 1502 and 1504 have been challenged. On April 14, a D.C. Circuit Court of Appeals panel ruled 2–1 that the “conflict minerals” provision, as applied by the SEC, could not withstand First Amendment scrutiny, even though the government has a fairly broad authority to regulate “commercial speech.” Noting that this mandated disclosure is not even “reasonably related” to the SEC’s mission of “preventing consumer deception,” the court’s opinion concludes:
By compelling an issuer [publicly-traded company] to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.
A federal district judge, also in D.C., did not reach First Amendment issues in ruling on Section 1504 but vacated the SEC’s application of the rule as “arbitrary and capricious.” Until there is final resolution by the Supreme Court, these provisions may continue to cost non-financial businesses and their customers plenty.
Even under the SEC’s constrained cost-benefit analyses, these rules are shown to weigh heavily on consumers. The SEC has estimated that each provision will make companies pay more than $1 billion in initial costs, followed by annual costs in the hundreds of millions. Moreover, U.S. energy companies exploring for resources abroad may be required to publicly disclose trade secrets, such as how much they paid for an individual project. Should this happen, state-owned oil companies in some of the world’s most corrupt nations will have access to this valuable info, and they won’t have to disclose anything in return. As American Petroleum Institute President Jack Gerard has pointed out, “the 16 biggest oil companies in the world do not fall under SEC jurisdiction,” because they don’t list on U.S. exchanges. And if the costs of these provisions force U.S. companies to pull out of developing countries, the results will not be pretty for those countries’ citizens.
Dodd-Frank’s “conflict minerals” provision already has led to a similar trend in mining. Because it is nearly impossible to source many minerals used in manufacturing to their countries of origin, many manufacturers have told their suppliers to avoid all regions of the Congo and all nearby nations. The celebrity activists pushing these measures would do well to read freelance journalist David Aronson’s New York Times op-ed describing how Dodd-Frank’s backdoor tariffs are harming Africa:
Mining towns are virtually cut off from the outside world because the planes that once provisioned them no longer land. . . . Villagers who relied on their mining income to buy food when harvests failed are beginning to go hungry.
So add to the long list of “accomplishments” by former Senator Chris Dodd (D., Conn.) and former Rep. Barney Frank (D., Mass.) the boosting of energy prices for American consumers and the further impoverishment of developing nations.
— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.