- Could “Free Speech” Issues Derail the SEC’s Conflict Minerals Rule?
- February 3, 2014 | Author: Frank S. Murray
- Law Firm: Foley & Lardner LLP - Washington Office
Shortly after the Securities and Exchange Commission (“SEC”) adopted its conflict minerals disclosure rule in August 2012, a coalition of business interests filed suit to challenge the SEC’s rule as unduly burdensome. That legal challenge to the conflict minerals rule entered its latest stage on Tuesday, January 7, 2014, when three judges of the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) heard oral argument and sharply questioned the SEC about whether the rule exceeded the SEC’s authority and the terms of the underlying statute. In an interesting twist, the judges’ inquiries suggested that application of First Amendment principles involving compelled speech may hold the key to the future of the conflict minerals disclosure requirement.
While much of the focus within the business community has been on the administrative burdens of tracing the origin of conflict minerals (tin, tantalum, tungsten and gold) used in a company’s products, the most spirited questioning from the bench during the recent oral argument related to whether the rule infringes companies’ freedom of speech. The business groups challenging the SEC’s rule have alleged that the conflict minerals disclosure regime represents government-compelled speech in contravention of the First Amendment. They have contended that the conflict minerals regime unconstitutionally compels companies to make an ideologically-driven, rather than fact-based, statement about their own products - namely, that the products “have not been found to be conflict-free.” This type of speech, they contend, forces companies to stigmatize themselves and denounce their own products based on information that is speculative, rather than fact-based. The business groups also object to the requirement that companies post conflict minerals reports and information on their corporate websites, contending during oral argument that those websites “are our space.”
Two of the three judges considering the challenge appear to agree that the conflict minerals rules compel speech, in a manner that raises a “slippery slope” problem. Does this type of forced disclosure, Senior Judge A. Raymond Randolph asked rhetorically, open the door for Congress or the SEC to require companies to make disclosures about labor conditions in their overseas operations and whether those conditions meet the standards of “socially conscious investors?” Senior Judge David Sentelle noted that the SEC’s rule went beyond the language in the underlying statute (Section 1502 of the Dodd-Frank Wall Street Reform Act), to impose reporting and due diligence requirements in a broader range of circumstances than would be required if the SEC had adhered to the statutory language. When the attorney for the SEC argued that the statute was silent about whether disclosures were required in the broader circumstances provided for under the SEC’s rule, Judge Sentelle countered the conflict minerals disclosures were “compelled speech,” and that “silence does not empower” the SEC to compel speech.
The questions asked by judges at oral argument are often an imperfect predictor of the outcome of an appeal, but it did appear that two of the three judges (Randolph and Sentelle) harbor considerable skepticism about the SEC’s existing conflict minerals disclosure regime, particularly the extent to which it compels companies to “speak” by posting information to their websites and identifying their own products as “not found to be conflict-free.” Thus, the pointed questioning of the SEC by Judges Randolph and Sentelle during oral argument offers some cause for optimism for those hoping the Court will rule in favor of the Industry Challengers.
While the tenor of yesterday’s oral argument suggests that at least some aspects of the legal challenge to the SEC’s existing conflict minerals rules may ultimately succeed, companies should nevertheless proceed with their conflict minerals due diligence and reporting obligations in the near term on the assumption that the existing rules will remain in place. As an initial matter, it is far from certain that the Court will issue a ruling before companies’ first conflict minerals reports are due in late May. Moreover, the deferential standard of review afforded to agency rulemakings still leaves ample room for the D.C. Circuit to join the lower court in upholding the SEC rule. Finally, even if the legal challenge succeeds, the most likely outcome is that the Court will remand the matter to the SEC to adopt a new final rule more closely comporting with the statute, or one that eliminates objectionable aspects of the current rule.
Thus, while the precise contours of companies’ conflict minerals reporting and due diligence requirements may change if the legal challenge succeeds, it is unlikely that the requirement to investigate and report information about conflict minerals sourcing will disappear altogether. Indeed, the European Union (“EU”) is in the process of developing and adopting its own conflict minerals policy (though the EU has indicated that it intends to focus the burdens of compliance as much as possible on the “upstream” portion of the mineral supply chain - i.e., the portion from the mines to the smelter/refiner - rather than manufacturers), and there will remain substantial public pressure for companies to develop “conflict-free” supply chains and steer mineral sourcing to certified “conflict-free” smelters or refiners as much as possible.