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From Securities Regulation Daily, September 13, 2013
By Jim Hamilton, J.D., LL.M.
A consortium of corporate and business groups has asked the D.C. Circuit to reverse a district court ruling upholding the SEC regulations implementing the conflict minerals disclosure provisions of Section 1502 of the Dodd-Frank Act. In a brief filed with the federal appeals court, the U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers argued that the SEC misconstrued the statute and acted arbitrarily and capriciously in violation of the Administrative Procedure Act and the Exchange Act (
Section 1502 of Dodd-Frank directed the SEC to issue regulations requiring companies to disclose their use of conflict minerals in certain circumstances. The SEC regulations apply to a company that uses tantalum, tin, gold, or tungsten if the company files reports with the SEC under the Exchange Act and the minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company.
District court opinion. On July 23, 2013, a federal district judge upheld the SEC regulations implementing the conflict minerals provisions of the Dodd-Frank Act. The court found that the Commission discharged any responsibility to consider whether the regulations will promote efficiency, competition, and capital formation, and that the Commission appropriately considered the impact on competition more generally. The court emphasized that the regulations were not promulgated by the Commission on its own accord, but rather the conflict minerals regulations were promulgated pursuant to an express, statutory directive from Congress. As a result, said the court, the SEC rightly maintains that its role was not to “second-guess” Congress’s judgment as to the benefits of disclosure, but to, instead, promulgate a rule that would promote the benefits Congress identified and that would adhere closely to that congressional command. The court also said that the SEC’s decision not to adopt some type of de minimis exception was rationally based upon the evidence before it. While it may be true that the adoption of some type of de minimis approach could also have been a reasonable alternative, noted the court, that does not render the SEC’s contrary determination arbitrary or unreasonable.
D.C. Circuit argument. The business groups argued to the D.C. Circuit that the SEC misinterpreted Section 1502 as precluding a de minimis exception, thus significantly increasing the rule’s costs. The fact that Section 1502 does not explicitly include a de minimis exception, they contended, provides no basis for the SEC’s refusal to create one, given that the agency had both express and implied authority to do so.
Moreover, the Commission incorrectly interpreted the term “did originate” to mean “may have originated,” noted the brief, vastly expanding the reach and costs of the regulations. The Commission mistakenly read the statute to cover companies that contract to manufacture products, extending the reach of the regulations and their costs to many companies who manufacture nothing.
The business groups also argued that the SEC arbitrarily created a shorter phase-in period for larger companies, even though it recognized that larger companies would need to depend on information from smaller companies to comply. More broadly, they contended that the SEC imposed requirements that will exacerbate the competitive harms to U.S. companies and rejected alternatives that would have lessened the burdens. Moreover, the Commission conceded that it could not identify any benefits for the Congolese people, or even determine whether the rules would make the tragic situation in the DRC even worse. The Commission simply asserted it was “not able to assess how effective Section 1502 will be in achieving those benefits.” The brief characterized this as a “remarkable lack of analysis,” which violates the SEC’s statutory obligation to apprise itself of the impact of the rules and the available regulatory alternatives before saddling U.S. public companies with a regulation that, by the agency’s own estimation, will cost $3 to $4 billion for initial compliance, plus $200 to $600 million per year for ongoing compliance.
Finally, the business groups argued that Section 1502 and the regulations implementing it violate the First Amendment by compelling companies to make misleading and stigmatizing public statements on their websites linking their products to terrible human rights abuses. The district court had rejected the constitutional attack against both the final regulations and Section 1502.
The case is
Attorneys: Peter D. Keisler (Sidley Austin LLP) for the National Association of Manufacturers, the Chamber of Commerce of the United States of America, and Business Roundtable.
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