CLS Blue Sky Blog

Quantified Cost-Benefit Analysis at the SEC

In their recent article, Jeff Schwartz and Alexandra Nelson critique the Securities and Exchange Commission’s cost-benefit analysis accompanying the Conflict Minerals Rule.[1] This rule requires public companies using conflict minerals in their production to annually disclose whether the minerals come from certain war-torn areas such as the Democratic Republic of Congo. Schwartz and Nelson contend that the SEC’s estimate of $3-4 billion in compliance costs was grossly overstated due to numerous flaws. They point to early evidence estimating actual compliance costs at $710 million to support their criticism. The article also chastises the SEC for failing to quantify expected benefits of a rule intended to reduce violence by curbing the flow of funds to mining operations controlled by militant groups. Schwartz and Nelson provide a timely contribution to the ongoing debate on the cost of supply chain transparency efforts to reduce human rights abuse.

Importantly, the article speaks to the broader topic of expanded economic analysis at the SEC. Schwartz and Nelson describe how a de facto quantified cost-benefit mandate arose through a series of decisions by the U.S. Court of Appeals for the D.C. Circuit that vacated SEC rules due to insufficient or flawed economic analysis. Following these setbacks, the SEC issued new guidance in 2012 on how it would conduct economic analyses moving forward, and significantly increased resources to its division tasked with integrating economic analysis into rulemaking.[2] Schwartz and Nelson argue that forced quantification at the SEC ultimately misinforms policy debate. They point to shortcomings in the cost-benefit analysis of the Conflict Minerals Rule as evidence of why the quantification mandate should be abolished.

In my invited response, available here, I discuss criticisms raised by the article about the SEC’s cost-benefit analysis in support of this rule, and its overall efforts to deliver higher-quality economic analysis.[3] I also highlight where the SEC’s cost-benefit analysis followed and deviated from its stated framework of best practices. I then propose pragmatic approaches to further improve the SEC’s economic analysis of this rule and in general.

Analysis of the Benefits

Schwartz and Nelson claim that the SEC ignored instructions to quantify expected benefits of the Conflict Minerals Rule. In this case, the primary expected benefit is reduced instances of violence in the Congo such as rape. The SEC chose to qualitatively, rather than quantitatively, assess these benefits because of difficulties in locating reliable data on violent actions in the Congo and the inherent challenges in pricing acts of violence.

The article suggests that the SEC could have employed other methodologies, such as surveys of how much people would pay to prevent violence, to estimate the value of the benefits. In my response, I contend that if the SEC had engaged in the onerous task of pricing and predicting human rights abuse, any estimate would have surely represented an inaccurate calculation of expected benefits. Yet, Schwartz and Nelson emphasize that the SEC is increasingly being asked to use securities regulation in order to achieve broader social goals. Thus, to the extent that this trend continues, I note that it will likely become increasingly difficult for the SEC to deem social benefits as unquantifiable.

Estimate of the Costs

The article emphasizes that the SEC did not conduct independent analysis to generate its cost figure for the Conflict Minerals Rule, and instead presented a cost model that combined elements of those submitted by two commentators. Schwartz and Nelson reverse engineer and scrutinize each component of these cost models. They conclude that the SEC’s cost estimate is based on weak assumptions and rationales, which in turn resulted in “fatal shortcomings.” While the reader is left wondering if any portion of the SEC’s cost model is useful, I focus primarily on two aspects:  the compliance cost per company and the number of affected companies.

After the first year of conflict minerals reporting in 2014, post-filing survey evidence by Tulane University estimates compliance cost at approximately $546,000 per company. The SEC’s cost estimate translates to about $596,000 per company using the midpoint of its estimate. Thus, while the SEC’s total compliance cost prediction is substantially higher than the survey evidence of the actual cost, the percentage error in the SEC’s cost per company forecast is relatively small.

The largest source of miscalculation in the SEC’s cost estimate is in the estimated number of affected companies. Although the SEC predicted that nearly 6,000 reporting companies would need to file conflict minerals related disclosures, only about 1,300 companies actually provided these disclosures in both 2014 and 2015. In my response, I note that there has been a nearly 20 percent decline in the number of companies reporting annually to the SEC between 2009, when the rule was proposed, and the first year of conflict minerals reporting in 2014. Therefore, a portion of the SEC’s miscalculation is due to a substantial decline in the overall number of reporting companies, a development that could not have been foreseen by SEC economists when the rule was proposed. Yet, even after adjusting for this decline, the SEC’s estimated number of affected companies remains overstated.

Suggestions for Improvement

Although Schwartz and Nelson suggest that this rule condemns quantified cost-benefit analysis at the SEC, I offer alternative suggestions for further improvement of the economic analysis. My primary suggestion is to conduct a retrospective analysis now that three years of conflict minerals reporting have occurred. I also propose specific areas where the SEC could provide greater transparency in its analysis. Given that the SEC admitted that some costs were purposefully inflated, I further encourage the Commission to avoid conservative cost estimates, especially for rules with social benefits that are difficult to quantify such as the Conflict Minerals Rule.


[1] Jeff Schwartz & Alexandra Nelson, Cost-Benefit Analysis and The Conflict Minerals Rule, 68 Admin. L. Rev. (forthcoming 2016), available at

[2] See Joshua T. White, The Evolving Role of Economic Analysis in SEC Rulemaking, CLS Blue Sky Blog (September 23, 2015), available at

[3] Although this analysis draws upon my prior experience as a Financial Economist at the SEC, I did not contribute to the economic analysis accompanying the Conflict Minerals Rule, nor did I discuss any of the analysis herein with SEC staff involved in this rule. The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its current or former employees. The views expressed herein are those of the author and do not necessarily reflect the views of the author’s colleagues or the staff of the Commission.

This post comes to us from Joshua T. White, Assistant Professor in the Department of Finance, Terry College of Business at the University of Georgia. It is based on his recent article, “Quantified Cost-Benefit Analysis at the SEC,” available here.


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