A drop of tin, a speck of gold. The tiniest trace of any so-called conflict mineral in a vast array of products—everything from buttons to cellphones to jet turbines—is now under the microscope of the U.S. Securities and Exchange Commission.

New SEC rules went into effect in January that will require about 6,000 publicly traded companies to report whether their products contain four conflict minerals from the Demo­cratic Republic of the Congo, where ­warlords are using proceeds from the mineral sales to fund a horrific campaign of murder, rape and torture.

It’s an initiative that the SEC, which generally spends little time considering foreign policy or human rights objectives, would probably not have chosen on its own; rather, the agency was directed to do so by Congress as part of the Dodd-Frank Act of 2010.

But the way the SEC has implemented the conflict-minerals rule has aroused vehement opposition from the U.S. Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable, which on Jan. 16 together filed their opening brief in a suit challenging the regulations. The petitioners stress that this is one of the most expensive SEC rules in history, with initial compliance cost estimates ranging from $3 billion to $16 billion, that the agency failed to do a cost-benefit analysis, and that the rule might not even help the people of the Congo.

“Aghast” is how Thomas Quaadman, vice president of the U.S. Chamber Center for Capital Markets Competitiveness, described the reaction of member businesses to parts of the final rule.

The SEC and Amnesty International, an intervenor in the case, counter that the rule is the will of Congress, and that it stands as “an important tool to address the trade and exploitation of minerals that help fuel widespread human rights abuses,” said Amnesty counsel Julie Murray, a staff attorney with Public Citizen Litigation Group.

As for the legion of lawyers and their clients on the sidelines, they’re left calibrating how aggressively to move to comply with a rule that the U.S. Court of Appeals for the D.C. Circuit may well overturn, especially given the SEC’s poor record when defending prior rules challenged on cost-benefit grounds.

Jane Luxton, a partner in Pepper Hamilton’s environment and energy group, said some companies “remain in denial and are not doing anything about [compliance], in part because of the lawsuit, which they hope will come along and rescue them.” Others, she continued, “are taking it seriously and focusing on how to get a handle on what’s really in their products. A surprising number of people have never had a reason to do this kind of investigation. … Considering the difficulty of getting this information, I don’t think anyone should be relaxing.”

Disclosure requirements

The SEC’s new role as conflict-minerals cop stems from Section 1502 of the Dodd-Frank Act. The law doesn’t ban companies from using the four conflict minerals—tin, tantalum, tungsten and gold—but it does trigger unprecedented disclosure requirements.

A public company that uses any of the minerals—even a trace amount—in any of its products must conduct a “reasonable country of origin inquiry” to determine the source. The minerals are used in a huge number of products, including automobiles, computers, light bulbs, ballpoint pens, thread and medical devices.

If a company knows or has reason to believe that its minerals came from the Democratic Republic of the Congo or one of its nine neighbors, then it must investigate the minerals’ source and chain of custody. This includes trying to figure out whether mineral proceeds may have directly or indirectly financed armed groups. The company must also obtain a private-sector audit and file a new “Form SD” with the SEC declaring that its products are “not DRC conflict free.”

When the rule was made final in August, then-SEC chairman Mary Schapiro said that she believed it “faithfully implements the statutory requirement as mandated by Congress in a fair and balanced manner.”

The business groups, however, sharply disagree, and tapped a team from Sidley Austin led by Peter Keisler to challenge the rule.

In their 60-page opening brief, the groups argue that the SEC’s actions were arbitrary and capricious in violation of the Administrative Procedure Act, that the agency failed to analyze the economic impact of the rule, and that the rule violates the First Amendment by compelling companies to make declarations associating their products with human rights abuses. “Good intentions are no substitute for rigorous analysis, and the Com­mission’s analysis here was woefully inadequate,” Keisler wrote in asking the court to vacate the rule.

Some of the most stinging criticism is directed at the SEC’s failure to do a cost-benefit analysis. The agency was particularly vague about the rule’s potential benefits, stating that it was “unable to readily quantify [the benefits] with any precision, both because we do not have the data to quantify the benefits and because we are not able to assess how effective Section 1502 will be in achieving those benefits.”

That’s not good enough, argued Arnold & Porter partner John Bellinger, who filed an amicus curiae brief last week on behalf of academics and former government officials who describe themselves as experts on the Democratic Republic of the Congo. Bellinger wrote that the SEC’s justification that the “agency is ill-equipped to analyze a rule aimed at social benefits relies on the astonishing proposition that analysis is no longer mandatory if it is difficult.”

Rather than provide benefits to the Congolese people, Bellinger, the former legal adviser to former Secretary of State Condoleezza Rice, argued the rule has done the opposite, and “added a terrible new dimension to the existing crisis.”

Mining is essential to the country’s economy, but companies have already ceased sourcing minerals from the region because of the SEC rule, according to the brief. “The SEC’s due diligence requirements make it prohibitively expensive for issuers to make even a preliminary determination that their minerals may have originated in the DRC or its neighbors,” Bellinger wrote. “The higher these compliance costs are, the greater the incentive for issuers to avoid triggering these due diligence obligations altogether—by abandoning sourcing from the DRC and its neighbors entirely.”

With the legitimate market for the minerals gone, the armed groups will actually benefit, he continued, because they are best-positioned to smuggle them instead. “The SEC’s rule may well create the worst of all worlds,” he wrote.

Amnesty counsel Murray, however, stressed that Congress “explicitly required the SEC to adopt the rule … to address the role of the minerals trade in financing human rights abuses in the eastern DRC. An argument that the rule isn’t necessary or beneficial is at odds with the considered judgment of Congress.”

SEC spokesman John Nester in an email echoed this theme, writing, “We believe our legal interpretation and economic analysis are sound and we look forward to defending the rule that Congress directed us to write.”

Still, the petitioners argue that the SEC could have made the rule less burdensome. For example, the agency refused to grant a de minimis exception, where companies would be excused from filing a report if their products contained only a trace amount of a conflict mineral.

Such an exemption would have been “a great help in eliminating burdensome requirements on industries that are not really part of the purpose and intent of the statute to begin with,” said Squire, Sanders & Dempsey partner Dynda Thomas, who leads the firm’s conflict-minerals team. For example, apparel, textile and personal-care product makers have been caught up in the reporting, but “the amount of the minerals they use is very small” and has no effect on helping fund Congolese warlords.

Rule opponents also complain that the SEC wrongly included nonmanufacturers such as retailers. “By requiring retailers to report on the use of conflict minerals in products that the retailer obtains by contract with third-party ­manufacturers, the SEC broadly swept in an entirely new sector of the economy,” wrote Eric Lasker of Hollingsworth and Eric Gotting of Keller and Heckman in an amicus brief filed last week on behalf of a coalition of seven industry groups. Another complaint: that the phase-in period for small companies is four years, but big companies only get two (even though many small companies are suppliers to big ones).

The petitioners did not ask that the rule be stayed—the first reports, covering the 2013 calendar year, are due at the SEC on May 31, 2014—but were granted an expedited schedule by the court, with oral arguments likely this spring.

The last time the SEC faced a cost-­benefit challenge, in a case involving proxy access rules, the D.C. Circuit issued a stinging rebuke, writing that the agency “failed adequately to quantify the certain costs or to explain why those costs could not be quantified.” In that case, however, the SEC issued the rule voluntarily, while in this instance, the directive to act comes from Congress.

Regardless of the court’s eventual decision, Michael Littenberg, a partner at Schulte Roth & Zabel, said that his advice to clients “is that they cannot wait for the lawsuit to resolve itself,” he said. “Unless a company has a very simple supply chain, if they wait, they’re going to be behind the curve.” He added, “This is a hard one for a lot of clients. … It’s a big compliance challenge.”