One of the most controversial and costly rules in U.S. Securities and Exchange Commission history is under scrutiny by a panel of federal appellate judges who questioned whether the requirement that publicly traded companies disclose the use of certain minerals from the Democratic Republic of the Congo violates the First Amendment.
“Is the objective to stigmatize companies?” asked Senior Judge A. Raymond Randolph of the U.S. Court of Appeals for the D.C. Circuit during oral arguments before a packed courtroom in Washington. Randolph described the disclosure requirement during the January hearing as “a slippery slope.”
The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable in October 2012 challenged the SEC’s so-called “conflict minerals” rule, which Congress directed the agency to implement as part of the Dodd-Frank Act. Amnesty International, represented by Public Citizen Litigation Group, intervened on the side of the SEC.
The business groups lost round one in July, when U.S. District Judge Robert Wilkins upheld the rule. Wilkins found “no problems with the SEC’s rulemaking” or any First Amendment violation. But the D.C. Circuit panel, which also included Judge Sri Srinivasan and Senior Judge David Sentelle, seemed critical of how the SEC implemented the rule and of the underlying law itself.
Intended to cut off funding for warlords and promote peace in the troubled region, the statute requires companies to investigate and disclose whether their products contain tin, tungsten, tantalum or gold from the Democratic Republic of the Congo or its neighbors. The minerals are used in a vast number of products, ranging from light bulbs to computers to sewing thread.
The business groups assert that initial compliance would cost $3 billion to $4 billion, and they question whether it would help the people of Congo. Even within the SEC, the rule is controversial. Two commissioners voted against it, and SEC Chairwoman Mary Jo White, appointed after it was enacted, voiced reservations in a recent speech at Fordham University School of Law.
Seeking to end human rights atrocities in the Democratic Republic of the Congo is a compelling objective, “which, as a citizen, I wholeheartedly share,” White said. “But as the chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.” However, she also noted that the agency “cannot say that a law does not comport with our mission as we see it, and ignore a congressional mandate.”
The business groups, represented by Sidley Austin partner Peter Keisler, argue that the SEC could have made compliance less burdensome by exempting companies that use just a trace amount of the minerals. For example, Keisler told the D.C. Circuit judges, General Motors Co. uses tin as a catalyst in making seat belts, a process that may leave a residue of one or two parts per million of the mineral.
“GM has to trace that speck of tin” back to the mine it came from, Keisler said. “It’s the kind of situation that cries out for a thoughtful, sensible approach.”
Still, the judges didn’t seem convinced that the SEC violated the Administrative Procedure Act by failing to create such an exception. Keisler acknowledged there were no precedents in which a regulation by any agency was struck down for that reason. “You’re asking us to really break new ground here,” Sentelle said.
“We’re not asking the court to order the commission to adopt a de minimis exception,” Keisler said, but rather to hold that the SEC’s analysis did “not qualify as reasoned decisionmaking.”
First Amendment concerns seemed to gain more traction with the court. Sentelle focused on the SEC’s procedures, including a requirement that companies post reports online detailing their due diligence investigations and results. “What empowers the commission to make them do that?” he asked SEC assistant general counsel Tracey Hardin. “This is compelled speech.”
“We have not made the argument this does not implicate the First Amendment,” Hardin said. “But what I’m trying to get at is the type of compelled speech we’re talking about, and the courts have been very clear that when you have a factual disclosure, that is subject to lesser scrutiny under the First Amendment.”
In his rebuttal, Keisler picked up on the theme. “It’s the worst kind of compelled speech,” he said, describing it as “ideological speech denouncing our own products. … It’s an act of self-shaming.”
Randolph also grilled Hardin on the issue. “What we have is something that you admit is within the realm of the freedom of speech, and one looks at whether the ends justify the means,” he said of the disclosure requirement. He questioned how it would help bring peace and security to the African nation. “How is this going to accomplish that?” he asked. “Is it because there will be a boycott by consumers of seat belts produced by General Motors? … Or is it because investors will not buy the stock of the particular company?”
Hardin countered: “The trade and exploitation of these minerals … is fueling and funding the conflict,” adding that the objective was to raise awareness of the minerals’ sourcing.
Randolph painted the requirement as the potential first step in an increasingly burdensome regime. He asked rhetorically, “Could Congress say all companies now have to report on the conditions of products manufactured overseas,” such as wages and workplace safety? “Is that the next step?”
A version of this story appeared in The National Law Journal, an affiliate of Corporate Counsel.