On Tuesday afternoon, a federal court upheld the Securities and Exchange Commission's controversial “conflict minerals rule,” a requirement that businesses using certain minerals that are mined in the war-torn Congo must disclose that use throughout their supply chain.
In a 63-page ruling, Judge Robert Wilkins of the United States District Court for the District of Columbia wrote that the plaintiff's claims “lack merit.”
, mandated by the Dodd-Frank Act and enacted by the SEC, applies to the mining of tin, tungsten, tantalum, and gold in war-torn Central Africa that is considered a source of funding for militant groups. The SEC's verification and disclosure requirements are estimated to directly apply to nearly 6,000 companies and hundreds of thousands of their suppliers.
Even before the SEC's final rule was approved in August, critics have lamented that purging their supply chains of these substances, or even just tracking their origin, would be a costly challenge. Those concerns led to a legal challenge, initiated in October of 2012, by the National Association of Manufacturers, the U.S. Chamber of Commerce, and the Business Roundtable. Among their arguments:
- The SEC failed to do the proper cost/benefit analysis of the rule and failed to determine that it would 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 to the Rule.
- 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.
- That the rule 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 has a statutory requirement to consider whether an action is necessary or appropriate in the public interest, weighing whether the action will “promote efficiency, competition, and capital formation” and not “impose a burden on competition not necessary or appropriate.” Wilkins, however, saw no reason to decide that requirement was ignored in its disputed cost/benefit analysis.
“By their terms, these provisions [of the Exchange Act] only obligate the SEC to “consider” the impact that a rule or regulation may have on various economic-related factors,” he wrote, adding that “to suggest that the that the SEC conduct some sort of broader, wide-ranging benefit analysis simply reads too much into this statutory language.”
He added that the analysis the SEC made was sufficient because it, rather than promulgating its own rule under its own terms, was executing a Congressional demand.
“As a result, the SEC rightly maintains that its role was not to “second-guess” Congress's judgment as to the benefits of disclosure, but to, instead, promulgate a rule that would promote the benefits Congress identified and that would hew closely to that congressional command,” Wilkins wrote.
The judge also rejected complaints that the rulemaking should have included a de minimis exemption, again citing the fact that substantial changes to the rule could circumvent the will of Congress. The full decision can be found here.
A decision earlier this month regarding a similar piece of Dodd-Frank rulemaking wasn't as successful for the regulator. A rule requiring oil, gas, and mining companies to publicly disclose payments made to governments for extraction rights was vacated by a court decision.
In October, the American Petroleum Institute (API), a trade association for the oil industry, sued the SEC, seeking to invalidate rulemaking that implemented Section 1504 of the Dodd-Frank Act and its reporting requirement for extraction payments.
In a harshly worded opinion, Judge John Bates of the Federal District Court of the District of Columbia vacated the rule and remanded it back to the Commission. Unless the SEC revisits the regulation or there is a successful appeal, the ruling means that these companies will not have to report aggregated payments exceeding $100,000, a requirement that was to begin for those with fiscal years ending after Sept. 30, 2013.