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."
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