Judges Reportedly Skeptical of Conflict Minerals Rules in Appeal Hearing Today
By Cydney Posner
I wasn't there, so I can't vouch for the accuracy of the views expressed, but this article in the WSJ, "Appeals Court Expresses Doubts About SEC Rule on Conflict Minerals," will be of interest to many companies currently struggling with the prospect of compliance with those rules. According to the authors, the appellate court that heard the appeal of the district court's decision upholding the SEC's conflict minerals rules, "voiced skepticism" about the rule. During the hour-long oral argument today, two conservative judges, David Sentelle and A. Raymond Randolph, on the three-member panel "expressed repeated concerns about the measure." According to the article, "Judge Sentelle said he thought the SEC's rule was written more broadly than required by Dodd-Frank. Both judges also appeared swayed by at least some of the free-speech concerns raised by the business groups challenging the measure. There seems to be ‘a slippery slope,' said Judge Randolph, who asked rhetorically if regulators would require companies to report on how their products are manufactured overseas, including whether they're made in factories that comply with U.S. workplace-safety rules. ‘Is that the next step here?' he asked." ( Well maybe – see my articles of 11/7/13 and 8/27/13.) According to the WSJ, "the judges appeared to have concerns with the underlying statute…. Judge Sentelle asked if it was ‘normal' for the SEC's rules to target everyday consumers rather than those investing in the firms. The disclosures seem more in line with a Federal Drug Administration requirement than the types of disclosures typically required by the SEC, he said." With more than a modicum of understatement, the SEC's counsel responded that "the rule is ‘unusual' for the agency but said the commission is following its mandate from Congress."
Reuters apparently viewed today's argument similarly. According to Reuters, two of the judges "raised concerns" about the rule, "questioning the rule's purpose and whether it tramples companies' free speech…. The forceful questioning on Tuesday by a majority of the three-panel U.S. Court of Appeals for the District of Columbia Circuit was at times sympathetic to the concerns of three business trade groups….. The free speech and congressional intent arguments took center stage during the court hearing, with one judge saying the rule forces companies to speak against their will, and another worrying whether the rule could pave the way for even more onerous corporate disclosures in the future. ‘This is regulation of speech,' said Judge David Sentelle, who asked [the SEC attorney] to read the Dodd-Frank statute aloud and then told her the rule's disclosure requirements appear to go beyond what the law requires. ‘This is compelled speech,' he added. Judge A. Raymond Randolph, meanwhile, asked questions about the objective of the rule, and whether it was intended to fuel boycotts of products, convince investors not to buy stock in certain companies or ‘stigmatize the companies.' [SEC counsel] told him the main goal of the measure is to ‘promote peace and security' in the DRC region and increase public awareness of the sourcing of the minerals, saying the trade of tantalum, tin, gold or tungsten is ‘fueling and funding a conflict.'"
The case arose out of a lawsuit filed in October 2012 by the National Association of Manufacturers, U.S. Chamber of Commerce and Business Roundtable asking the court to modify or set aside the SEC's conflict minerals rules, which implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In July 2013, the federal district court handed the SEC a victory by granting the SEC's motion for summary judgment. In concluding that the plaintiffs' claims lacked merit, the district court found "no problems with the SEC's rulemaking and disagree[d] that the ‘conflict minerals' disclosure scheme transgresses the First Amendment." In addition, the lower court concluded that it should not "substitute its judgment" for the SEC's. (See my email of 7/24/13 and the related Cooley Alert, "SEC's Conflict Minerals Rules Survive Court Challenge.") The plaintiffs appealed that decision and the U.S. Court of Appeals for the District of Columbia Circuit heard argument on the challenge today.
With regard to timing of the decision, according to Reuters, the judges "did not indicate a timeline for when they may rule." Unless the rule is vacated by the court, compliance is still required and companies have until May 2014 to file their first Forms SD with the SEC. (It's notable that, when a district court threw out the SEC's resource extraction rules, also mandated by Dodd-Frank, the SEC chose not to appeal and instead indicated its intent to rewrite those rules. See my email of 9/3/13.)