??The Securities and Exchange Commission had until April 7 to defend its controversial conflict minerals rule by appealing to the Supreme Court.
While many watched for the filing of a writ of certiorari on the deadline day, there was a twist: a decision to forgo a challenge was made, with little fanfare, last month. The decision was outlined in a March 4 letter to Speaker of the House Paul Ryan from Attorney General Loretta Lynch.
“Although the Commission defended the constitutionality of the conflict-minerals disclosure regime in the court of appeals, the Department of Justice has decided, in consultation with the Commission, not to file a petition for a writ of certiorari seeking review of the court of appeals ' decision,” Lynch wrote. The decision not to seek Supreme Court review will allow the Commission or the district court to determine in the first instance, subject to further review, whether such an amended rule can and will be promulgated.
[A tip of the hat to Elm Sustainability Partners for first reporting on the largely overlooked communication].
On Nov. 10, the U.S. Court of Appeals for the D.C. Circuit denied requests from the SEC and Amnesty International for an en banc rehearing—one argued before a full complement of the court’s judges—of an earlier decision that found certain disclosure requirements in the rule to be unconstitutional. Specifically, the court took issue with disclosures and audits that ultimately would force companies to declare whether their products do or don’t use Congolese minerals that help fund violent militias. That decision resolved a lawsuit against the SEC and the Conflict Minerals Rules brought by the National Association of Manufacturers, U.S. Chamber of Commerce, and the Business Roundtable. The SEC, however, did have the option to ask the U.S. Supreme Court to review the appellate court’s decision.
"The panel majority and the dissenting judge also disagreed on the question whether the disclosure requirements at issue here, which compel some issuers to state publicly that their products have ‘not been found to be 'DRC conflict free,’ are properly characterized as involving ‘purely factual and uncontroversial information.’ The need to resolve that case-specific issue could likewise make it difficult for the Supreme Court to provide useful guidance concerning the application of the First Amendment to more typical disclosure requirements,” Lynch wrote.
Escalating the case to the Supreme Court was seen by many as an uncertain proposition, with an end result that could reestablish the SEC’s authority to set rules, or backfire if the high court upholds the lower court’s decision, and perhaps even creates new case law that undermines other securities rules and disclosure requirements. “The ruling opens a path for corporations to challenge many of the securities laws, rules, and regulations based on their First Amendment protections,” Michael Siebecker, law professor at the University of Denver, told Compliance Week at the time.
In response to what was legal uncertainty, the U.S. Chamber of Commerce announced that it would focus its legal firepower on defeating the Conflict Minerals Rule’s disclosure requirements, rather than the SEC’s similarly controversial pay ratio rule. The strategy: prevailing in the former battle would clear a path to defeating the latter.
On the other end of the political spectrum, an amicus brief was filed in the earlier court case by a diverse group of organizations, among them: the Public Health Law Center, Campaign for Tobacco-Free Kids, American Cancer Society Cancer Action Network and Tobacco Control Legal Consortium. They argued that the court’s limits on mandatory disclosures could apply to any number of public health labeling requirements, and perhaps even apply to Occupational Safety and Health Administration warnings to employees about workplace hazards, environmental notifications, and mandatory disclosures to consumers in financial transactions.
“Many important protections are similarly threatened by the holding that any disclosures, however undisputed their factual accuracy, are subject to more stringent review if they concern an issue about which there is public controversy or where there is controversy over the significance of the facts to be disclosed,” they wrote. “The imposition of a proof-of-effectiveness standard would delay or prevent such basic warning label regimes as those governing the presence of allergens in food, the safety of children’s toys, and the serious side effects of prescription drugs. Indeed, it is difficult to see how even the most commonsense regulation requiring, for example, signs stating the maximum occupancy for public meeting spaces, or that employees should wash their hands after using the restroom, or just “EXIT,” could readily survive a similar ex ante demand for proof of effectiveness. The panel’s holding would invite legal challenges to, and demand judicial reconsideration of, a wide array of disclosure regimes that benefit the public in numerous ways and that have never been considered constitutionally problematic.
Until the SEC decides whether or not to develop a new or amended rule, companies will want to maintain the current status quo, especially with this year’s Form SD filings due on June 1.
The SEC issued guidance in August 2015 that maintains required Form SD disclosures and supply chain due diligence, without requiring a declarative admission of conflict minerals use. Companies will need to still conduct due diligence of their supply chains, engage with suppliers to refine that due diligence, and be prepared, if there is action down the road that puts these requirements, including the audit requirement, back in place. Absent any further guidance by the SEC, that guidance still remains relevant.
As for the prospect of a rule amendment, Lynch that the majority of the Appeal’s Court panel “expressly recognized that its holding of unconstitutionality may apply only to the Commission's rule rather than to the underlying statute. “
“If, after remand, it is determined that the statute itself does not require use of the specific phrase ‘not been found to be DRC conflict free,' the Commission could promulgate an amended disclosure rule that attempts both to fulfill the statutory mandate and to comport with the court of appeals' view of the First Amendment,” she wrote.