Court Receptive to Overturning SEC’s Conflict Minerals Disclosure Rule

According to Greenwire:

Major industry groups urged federal appellate judges today to overturn a Securities and Exchange Commission rule that required companies to disclose whether their products contained minerals from conflict-ridden central Africa.

Industry, led by the U.S. Chamber of Commerce and National Association of Manufacturers, is challenging the SEC’s “conflict minerals” rule. Congress instructed the commission to promulgate such a rule in the 2010 Dodd-Frank Wall Street reform legislation to address the humanitarian crisis in the Democratic Republic of the Congo, or DRC.

Industry groups claimed at the U.S. Court of Appeals for the District of Columbia Circuit that the SEC went further than Congress intended. The groups took issue with several aspects of the rule, but most importantly, they argued that the SEC rewrote the law when it required companies to disclose on their websites if their products contain minerals that “may have originated” in the DRC.

Peter Keisler of Sidley Austin LLP, representing the groups, said Congress only intended to have that requirement if companies knew for certain that minerals came from the area.

“That just rewrites the statute’s standard,” Keisler said before a crowded courtroom.

Keisler appeared to gain traction with a majority of the three-judge panel. Senior Judge David Sentelle asked the SEC’s lawyer to read the law’s language. Referring to the SEC adding “may have originated” to the final rule, Sentelle, a Republican appointee, asked, “Doesn’t that sound like a lot more than what Congress asked the commission to do?”

The SEC finalized the rule in September 2012, requiring all manufacturers to conduct due diligence to determine whether any minerals in their products came from mines in the DRC. If they did, they must disclose the products both to the SEC and on their websites.

Industry groups quickly filed lawsuits challenging the rule. They say the rule creates “astronomical costs” of about $3 billion to $4 billion initially, then $200 million to $600 million annually thereafter.

They also contend that the nature of the global supply chain makes it difficult to determine whether the minerals at issue — tin, tantalum, tungsten and gold — came from African conflict zones.

The groups originally filed their challenge with the D.C. Circuit, but the circuit kicked it back down to lower court without ruling on the issue. Judge Robert Wilkins of the U.S. District Court for the District of Columbia sided with the SEC last July.

Wilkins, who is currently a nominee to the D.C. Circuit, held that the SEC was expressly instructed to promulgate such a rule (Greenwire, July 24, 2013).

SEC lawyer Tracey Hardin defended the commission’s actions, arguing that it made reasonable interpretations in implementing the statute and the court should defer to its judgement.

Further, she said there was flexibility in whether the disclosure requirements were triggered and when companies would be able to lawfully avoid disclosure.

“You don’t have to have certainty,” she said, adding that companies could rely on what their suppliers tell them.

Judge Srikanth Srinivasan appeared to take issue with some aspects of industry’s arguments. He noted that the groups aren’t challenging the SEC’s disclosure requirement if a company has “reason to believe” its products include conflict minerals, only the “may have originated” language.

That “confuses me a little bit,” the Democratic appointee said, because it also involves degrees of uncertainty.

Sentelle also criticized industry’s challenge to the SEC not creating an exemption for companies that use only a very small amount of conflict minerals. He noted that a circuit court has never struck down a rule for failing to include a so-called de minimus exemption.

Industry, he said, is “asking us to break new ground here.”

A large portion of the hearing, however, focused on the free speech argument of industry groups that the government cannot force companies to post statements on their websites that denounce their products as “not conflict free.”

Senior Judge Arthur Raymond Randolph, a Republican appointee, was clearly concerned about the website requirement and the general aim of the rule. He questioned whether the SEC should be writing rules aimed at informing public opinion, not necessarily investors.

Keisler said in most cases the disclosure requirement would be triggered when the company “simply cannot tell” where the minerals actually came from.

“This is a shaming statute,” he said. “It’s a scarlet letter.”