The Securities and Exchange Commission finds itself yet again at a legal crossroads concerning its embattled Conflict Minerals Rule. One path leads to the Supreme Court; the other, a retreat from a cornerstone of the rule’s disclosure requirements.

And at stake is not just the Conflict Minerals Rule alone, but potentially a wide range of other government regulations and rule proposals crafted in response to social issues and worker protections.

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.

For now, that decision resolves 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 real question is what the SEC does next. It has 90 days to ask the U.S. Supreme Court to review the appellate court’s decision. The agency hasn’t signaled its intentions yet, and the decision is not necessarily an easy one. An appeal to the Supreme Court might reestablish the SEC’s authority to set rules—or it could 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 D.C. Circuit’s opinion, and denial of the en banc request, “strikes a potentially significant blow to the securities regulation regime and the integrity of the U.S. capital markets,” says Michael Siebecker, law professor at the University of Denver. “The ruling opens a path for corporations to challenge many of the securities laws, rules, and regulations based on their First Amendment protections.”

The Supreme Court has “never clearly articulated definitions for commercial speech, political speech, or the boundaries between them,” Siebecker says. It has “obliquely suggested that certain aspects of the securities laws, rules, and regulations remain outside the reach of the First Amendment,” but not offered “any sound jurisprudential grounds for creating an island of immunity for the securities laws from First Amendment attacks.”

The D.C. Circuit Court’s ruling is already prompting critics of other disclosure demands to make a similar argument. The U.S. Chamber of Commerce has announced that it will focus its legal firepower on defeating the Conflict Minerals Rule’s disclosure requirements, rather than the SEC’s similarly controversial pay ratio rule. Prevailing in the former battle clears a path to defeating the latter, its spokespeople have explained.

“I don’t imagine that the entire edifice of the securities disclosure laws is going to crumble as a result of these cases, but I can imagine that, especially with regard to some of the disclosure mandates with a social component, business groups might be interested in challenging those on this basis,” says Cydney Posner, special counsel in the law firm Cooley’s business department.

“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,”
Kelly Babson, Partner, Nixon Peabody

It isn't just covered companies that are closely monitoring the situation. "There were amicus briefs by people who might seem to have nothing to do with conflict minerals,” Posner says. “They are concerned, however, that the potential impact is broader than it might have first appeared.” For example, an amicus brief was filed 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 OSHA warnings to employees about workplace hazards, environmental notifications, and mandatory disclosures to consumers in financial transactions. 

Social Policy and Securities Law

The Conflict Minerals Rule is a supply chain issue forced into securities law, says Frank Murray, senior counsel with Foley & Lardner, and the two are not a naturally good fit. “If you are going to do it in this case, there are other square pegs you can jam into the round hole as well.”

The concern, he says, is the slippery slope of further advancing social or political agendas through rulemaking. On that basis, the Supreme Court’s conservative majority might be more than wiling to take the case.

“You have a possibility that the Supreme Court could weigh in again on some of these commercial speech issues,” Murray says. “It is not a concern about misleading anyone [as past restrictions on commercial speech have focused on], it is more a concern about trying to stigmatize companies and advance policy goals through the concept of disclosure.”


Selections from an amicus brief signed by the American Cancer Society and other health advocates in support of the SEC's Conflict Minerals rule is below.
Mandatory  commercial  disclosures  in  many  contexts  besides  advertising and  product  labels play  a  crucial  role in  protecting  the  public. Required  notifications  of hazards  protect  public safety (authorizing OSHA to  require  warnings  to  employees  about  workplace  hazards, information about  stored  hazardous  chemicals  to  be reported and  made publicly  available).; environmental protection  depends  on  extensive notification  requirements (requiring  reporting  of  toxic chemical emissions).   Required disclosures  protect  consumers  in  financial  transactions (mortgage brokers  must  make specific disclosures  about  loan  fees  and  terms, credit  reporting agencies must  provide specified  disclosures).   Personal  privacy  is  protected  by requiring  health  plans and  health  care providers  to  inform  patients  of  their  privacy rights. Requiring  home lenders  to make public information about  the race,  national  origin,  sex  and  income of  loan  applicants  and actual borrowers, helps  deter  discriminatory  lending  practices. 
None of the foregoing disclosures  occur in  advertisements  or on  product labels. Therefore, according  to  the rule  of  the  panel,  all  would  be reviewed  under standards  at  least  as  stringent as  those  of  Central  Hudson  Gas  &  Electric Corp.  v. Public Service Commission (1980),  a  test under which  no  regulation has  survived  Supreme Court  review  for  two  decades.  
A  holding  with  such  drastic  implications  for  such an  extensive  body  of  jurisprudence  surely involves  an  important  question  of  law. 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.  Under  the panel  majority’s rule,  the requirement  that  automobile  manufacturers disclose mileage ratings  and  affix  a  label to the fuel  compartment  of  vehicles capable of  operating  on  alternative fuels would  apparently  be subject  to  heightened  scrutiny  because of  public controversies  about  climate change.   Similarly, disputes  about  the ethics  of animal  research  would  trigger enhanced  review  of  straightforward recordkeeping  and  reporting  requirements  for research  facilities,  and  disagreements  about mandatory vaccinations  would  support  heightened  scrutiny  of requirements  that  schools report immunization  rates.   
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. In  sum,  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.  Whether such  an  overhaul  of regulatory  jurisprudence  is  called  for  is surely  a  question  of exceptional  importance. 
Source: Public Health Law Center.

A Supreme Court ruling could mean the difference between scaling back rules shaped by social concerns, or giving the government a “green light,” he adds.

The pressing question for compliance officers is what the latest turn of events means for public companies covered by the rule. The consistent advice from experts is to ignore the noise and stay the course.

“At this point the denial of the rehearing essentially means that the status quo is preserved,” says Kelly Babson, a partner at law firm Nixon Peabody. “What that means, in practical terms, is that absent any further guidance by the SEC or legal action, which is probably unlikely, companies will essentially be in the same position they were a year ago with respect to their disclosure obligations under the rule, other than the specific portions that have been invalidated.”

The SEC issued guidance in August that maintains required Form SD disclosures and supply chain due diligence, without requiring a declarative admission of conflict minerals use. Layman’s translation: yes, you have to keep going through the exercise of Conflict Minerals Rule compliance; you just aren’t compelled to disclose what you find.

“We don’t have the labeling requirements of the rule, but the rest of the requirements stand,” Babson says. “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,” she says.

Meanwhile, you still have activists and vocal supporters of the rule to contend with. “They are reviewing filings and can play the shame game,” Babson says. “They are prepared to call out issuers who don’t appear to be taking it seriously and in compliance with either the technical terms or spirit of the rule.” There are also a variety of sustainability reporting initiatives that don’t necessarily apply to U.S. public companies, but some want these frameworks to be adopted anyway and do the work that regulators may be denied.

For now, companies should continue to monitor further litigation and regulatory developments, Babson says. Aside from a Supreme Court appeal, the SEC could also propose amendments to the current rules to address the First Amendment issues found by the Court. “In any of these cases, however, it is unlikely that the constitutional issues would be resolved prior to the 2016 filing deadline,” she says.