One of the most controversial—and costly—rules in U.S. Securities and Exchange Commission history faced tough scrutiny Tuesday by panel of federal appellate judges, who questioned whether the requirement that publicly traded companies disclose the use of certain minerals from the war-torn Democratic Republic of the Congo violates the First Amendment.

“Is the objective to stigmatize companies?” Senior Judge A. Raymond Randolph of the U.S. Court of Appeals for the D.C. Circuit said during oral arguments before a packed courtroom in Washington. Randolph described the disclosure requirement 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.

The business groups lost the first round in July, when U.S. District Judge Robert Wilkins upheld the rule, finding “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 skeptical of how the SEC implemented the rule and 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 complain that initial compliance with the provision will cost $3 billion to $4 billion, and they question whether it will even help the people of the Congo. Represented by Sidley Austin partner Peter Keisler, the groups say 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 judges, General Motors uses tin as a catalyst in making seat belts, a process that may leave a residue of 1 or 2 parts per million of the mineral.

“GM has to trace that speck of tin” back to the mine where 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 a de minimis exception. Keisler acknowledged there were no prior cases where 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 instead argued that the SEC’s analysis did “not qualify as reasoned decision-making.”

Randolph came back to the GM example when he questioned SEC assistant general counsel Tracey Hardin. “What we have is something that you admit is within the realm of freedom of speech,” Randolph said of the disclosure requirement. “Can you sum up and tell me what the objective of this statute is?”

“To promote peace and security in the Democratic Republic of the Congo,” Hardin answered.

“That’s the end. This is a means,” Randolph said. “How is this going to accomplish that? … Is it because there will be a boycott by consumers of boycott seat belts produced by General Motors? … Or is it because investors won’t buy the stock of the particular company?”

“The trade and exploitation of these minerals from [Congo] is fueling and funding the conflict,” Hardin said. “The objective here is more careful sourcing practices, not an embargo.”

Srinivasan followed up, asking whether the rule had anything to do with “advising investors about the nature of the companies they might be investing in?”

Hardin said the information was important to socially conscious investors, though she also said that providing investor information was not the main objective of the statute.

“Could Congress say all companies now have to report on the conditions of products manufactured overseas?” such as wages and workplace safety, Randolph asked. “Is that the next step?” He also wanted to know how the SEC planned to enforce the law. “Will you have a bunch of scientists test for metals in products?” he asked. Hardin said no.

Sentelle questioned the SEC’s procedures for compliance, including posting a report detailing the due diligence investigation and results. “Doesn’t that sound like a lot more than what Congress authorized the commission to do?” Sentelle asked. “Does that language empower the commission to require the kind of speech you’re doing here. … This is compelled speech.”

“We have not made the argument this does not implicate the First Amendment, that’s correct,” 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.”

Keisler in his rebuttal 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.”

“That makes it more, not less, offensive under the First Amendment,” Keisler said.

Jenna Greene writes for The National Law Journal, an American Lawyer affiliate.