In an attempt to knock down the Securities and Exchange Commission’s so-called “conflict minerals” reporting requirement, industry attorney Peter D. Keisler today argued that the government is making companies shame themselves by telling their customers that products might contain materials from war-torn Africa.
“This is a shaming statute. This is a Scarlet Letter statute,” Keisler, a partner at Sidley Austin LLP who represents the National Association of Manufacturers and other industry groups, argued today before the U.S. Court of Appeals for the District of Columbia Circuit.
A federal district judge in July ruled that the SEC transparency rule withstood industry’s legal attacks, saying the SEC properly implemented requirements required by Congress in Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
Under the rule, mandated as a human rights measure by Congress, manufacturers must determine whether certain metals in their electronics or other products come from the Democratic Republic of Congo or adjoining countries, where the proceeds of mineral sales has been used to fund violent conflict.
Companies with products that might contain covered materials are required to inspect their supply chains and to report publicly if products were not found to be “conflict free.”
SEC attorney Tracey A. Hardin today said that while the disclosure requirement is somewhat unusual for the commission, the rule itself properly follows congressional mandate.
Industry groups, including the U.S. Chamber of Commerce and Business Roundtable, have fought the rule from the start. They lament the cost of determining if even trace amounts of the materials are used in their complicated supply chains. Aside from the cost and difficulty, they say the government is asking them to denounce their own products.
At the heart of the argument, industry claims the SEC is imposing burdens beyond anything envisioned by Congress.
The final rule, Keisler said, covers more companies more broadly than Congress intended.
In particular, industry is unhappy that the rule requires companies to report under a less stringent reporting standard than the original statute. Keisler said the SEC is improperly requiring companies to file a conflict minerals report if they have reason to believe minerals “may have originated” in the DRC region.
The statute, he argued, clearly states that companies must file a report only when a mineral did originate in the region.
“What the SEC did here is put words back in that Congress had specifically taken out,” Keisler said today.
U.S. Circuit Judge Sri Srinivasan questioned whether it is different to say a company has reason to believe minerals may come from the region as opposed to saying it has reason to believe the minerals did come from the region.
“When we’re in the realm of reason to believe, we’re already in the realm of uncertainty,” Srinivasan said.
Keisler said using “may” instead of “did” as a reporting trigger means companies are dealing with mere possibility rather than probability.
Industry also laments that the government arbitrarily decided not to include any de minimis exception for products that may have negligible amounts of the covered minerals. Keisler today said the SEC had the power to include exceptions to the rule and decided not to without any reasoned analysis.
An exception, Keisler said, would keep companies from having to report small traces of minerals that remain in a product but aren’t necessary for the product to function. These amounts could be so small, he argued, that they would not harm the SEC’s goal of constricting the use of minerals that may fund armed conflict.
The issue, Keisler said, “cries out for a thoughtful, sensible approach to de minimis.”
Aside from arguments over the details of when reporting is required, Keisler argued the rule stomps on the First Amendment.
Free speech would not be violated, Keisler said, if companies were only required to give factual information to the government. But industry cries foul at having to say that their own products have materials not found to be free of conflict.
Such statements, Keisler argued, are compelled speech to serve a political cause rather than to inform shareholders.
Senior U.S. Circuit Judge A. Raymond Randolph asked if the point of the rule was to give customers information that could lead to product boycotts.
Hardin denied that notion.
“The objective here is more careful sourcing — not an embargo,” she said.
Hardin noted that commenters on the rule said that some socially conscious shareholders view conflict minerals transparency as an important issue in determining whether or not to invest in a company.
However, she conceded that the main point of the rule is not to inform shareholders but rather to limit human rights abuses tied to the sale of conflict minerals in the DRC and surrounding areas.
Hardin said there is nothing unreasonable in the SEC’s reporting standard, which interprets language mandated by Congress.
But Senior U.S. Circuit Judge David B. Sentelle said the SEC went beyond Congress’ requirement for disclosure when minerals “did originate” in the DRC region.
“You read me those words twice,” Sentelle said. “You’re instead requiring them to issue an extensive statement that says a good deal more than that.”
Both Sentelle and Randolph asked if it was strange that the SEC is requiring disclosure the public about an issue not clearly linked to product safety or to provide information to investors.
“We’re not here discussing the rationality of the statute,” Hardin said, noting that the rule is a unique requirement for the SEC.
The rule has been contentious since before it was even made final in August 2012. The commission widely missed its deadline for a final rule, and the U.S. Chamber of Commerce had asked the SEC to scrap its draft and start over.
Shortly after the final rule appeared, industry groups filed the October 2012 lawsuit, now on appeal.
A similar extractive industries transparency rule was vacated by a federal judge in July 2013, following industry outcry on the potential harm it posed to companies.
In that case, the SEC decided not to appeal and is redrafting the rule.