SEC's conflict minerals rule questioned

July 3, 2013

The conflict minerals rule from the U.S. Securities and Exchange Commission (SEC), the rule that forces public companies to disclose if their products contain minerals extracted in the Democratic Republic of Congo, was questioned by federal judge after it was challenged by three business trade groups.

Judge Robert Wilkins of the U.S. District Court for the District of Columbia questioned if United States courts should intervene, and suggested that the court defer to congress on the matter.

Three business trade groups are challenging the rule on the grounds that it is nearly impossible to track minuscule amounts of such minerals in their supply chains. They also say the rule violates companies' free speech rights because it makes them engage in “politically charged” speech, Reuters reported.

While supporters of the rule say it will help socially conscious investors, opponents say the rule is a compliance nightmare that will cost billions and unfairly tarnish companies' reputations by forcing them to make political statements about their products.

Reuters reported that during roughly three hours of oral arguments, Wilkins suggested to an attorney for the trade groups that federal courts should consider deferring to Congress on the matter.

“This is a circumstance where a court should really defer to Congress and the executive in an area of foreign policy where the court has no expertise,” he said.

Wilkins did, however, also question whether the SEC properly used its powers to minimize any negative impacts when drafting the rule.
The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable are challenging the rule, which was called for in an provision of the 2010 Dodd-Frank Wall Street reform law and adopted by the SEC last year.

The case is being watched by the European Union, whose officials are also considering conflict mineral rules. The SEC case is not expected to end at the district court, because experts believe it will be appealed, whatever the decision.

The SEC rule in question requires publicly traded manufacturers to disclose whether any tantalum, tin, gold or tungsten used in their products may have originated from the conflict-ridden Democratic Republic of Congo which has been castigated for committing human rights abuses.

Companies captured by the rule must undertake an inquiry to determine the country of origin for the minerals, which are often used in electronic devices such as cell phones.

If the minerals do come from that part of Africa, then the companies must undertake due diligence on the source and supply chain, publicly file a separate report and obtain an independent, third-party audit.

“What gives this such bite ... is the fact ... we have to characterize our products as tainted by the human rights violations,” said Peter Keisler, an attorney for the business groups. “We are required to wear this scarlet letter.”

The SEC counters that the rule merely requires companies to disclose factual information about their findings, similar to the same kinds of regulations that require restaurants to disclose calorie counts.

The groups challenging the rule also allege that the SEC did not properly weigh the costs and benefits of the regulation - a legal argument that has successfully been used in past cases to kill SEC rules.

The SEC has said its hands are tied because Congress did not intend to give a broad exemption from the rule for “de minimis” amounts of conflict minerals.

SEC lawyer Tracey Hardin contended that it would be inappropriate for the SEC to exempt de minimis amounts as long as Congress had determined there was a regulatory benefit associated with such disclosures.

 

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