A federal appeals court on Tuesday heard oral arguments in a case that threatens to undo the Securities Exchange Commission's disclosure requirements for “conflict minerals.”
Hearing arguments brought before the U.S. Court of Appeals for the District of Columbia Circuit, a three-judge panel – that included Republican appointees David Sentelle and A. Raymond Randolph, and Obama appointee Sri Srinivasan –heard objections and defenses for the controversial rule. Peter Keisler, a partner with the law firm Sidley Austin represented the business groups in opposition to the rule; the SEC was represented by Assistant General Counsel Tracey Hardin
Issued by the SEC in August 2012, the rule requires companies to disclose information each calendar year on the source of tantalum, tin, gold, and tungsten, minerals that have funded violent conflict in the Democratic Republic of the Congo and adjoining countries. Companies must conduct a “reasonable” country-of-origin inquiry to determine if the minerals originated from the covered countries; track and document the source and chain of custody; and include findings in a public report.
Disclosures for the first year of the rule are due by May 1. The second reporting year, which began on Jan. 1, no longer allows companies to enjoy the reprieve of an “indeterminable” status that was allowed in 2013.
A legal challenge initiated in October of 2012 by the National Association of Manufacturers, the U.S. Chamber of Commerce, and the Business Roundtable sought to invalidate the rule, but it was upheld by Judge Robert Wilkins of the U.S District Court for the District of Columbia in July 2013. He dismissed their claims as “lacking merit.”
The three groups appealed that ruling, setting the stage for Tuesday's oral arguments. Their arguments against the rule:
- The SEC failed to do the proper cost/benefit analysis of the rule and failed to determine that it would actually provide the intended benefits.
- The Commission acted arbitrarily when it imposed more stringent requirements and rejected less burdensome ones. It was also wrong to conclude that it could not create a de minimis exception.
- An unreasonably stringent “reasonable country of origin inquiry” demand was imposed if companies have “reason to believe” minerals may have originated in the covered countries.
- The SEC was wrong to extend the rule to those who contract with others for the manufacture of products, and acted arbitrarily when it provided a shorter phase-in period for larger companies and a longer phase-in period for smaller ones.
- It violates the First Amendment by compelling companies to make “misleading and stigmatizing” public statements that suggest their products contribute to human rights abuses.
The SEC maintains that it had a statutory obligation to issue the rule because it was a mandate of the Dodd-Frank Act. Creating exemptions, or weakening the rule, would go against Congressional intent, it argues.
The plaintiffs, judging from reports emerging from the courtroom, may have found two judges who are more receptive to their cause than Wilkins was. Reuters, for example, termed the approach by Sentelle and Randolph as “forceful questioning” of the SEC.
The judges pondered whether the SEC rulemaking didn't so much meet Congressional intent, as to go beyond it. They also, according to reports from those in attendance, raised concerns that the rule's consumer-facing disclosures, often referred to as “name and shame,” could be the catalyst for other rules that focus on societal ills, rather than the SEC's core responsibilities of investor protection, efficient markets, and capital formation. Child labor, minimum wage laws, and workplace safety rules were among the matters Congress could impose, it was suggested.
It may be difficult, going forward, for the SEC to shake off this concern, especially since Chairman Mary Jo White has expressed it herself. During an October Congressional hearing, she pushed back against some of the legislative directives her commission has had to execute with little leeway. The conflict minerals rule, she said, “seems more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information.”
No timeline was set for when a decision from the judges will be issued.