Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, January 7, 2014

SEC defends regulations implementing conflict minerals provisions of Section 1502 in oral argument

By Jim Hamilton, J.D., LL.M.

The D.C. Circuit Court of Appeals heard oral arguments in a case challenging the SEC regulations that implemented the conflict minerals provisions required by the Dodd-Frank Act. The petitioners are a business consortium composed of the National Association of Manufactures, Chamber of Commerce, and Business Roundtable. Dodd-Frank Act Sec. 1502 directs the SEC to issue rules requiring companies to disclose their use of conflict minerals if those minerals are necessary to the functionality or production of a product manufactured by those companies. Under the Dodd-Frank Act, those minerals include tantalum, tin, gold, or tungsten. A three-judge panel composed of Circuit Judge Srikanth Srinivasan, Senior Circuit Judge David Sentelle, and Senior Circuit Judge A. Raymond Randolph heard the argument. Peter Keisler argued for the business coalition and Tracey Hardin advocated for the SEC (National Association of Manufacturers v. SEC, No. 13-5252, January 7, 2014).

Under the final regulations, a company that uses any of the designated minerals would be required to conduct a reasonable, good faith, country-of-origin inquiry reasonably designed to determine whether any of its minerals originated in the covered countries or from scrap or recycled sources. If the inquiry determines (1) that the company knows that the minerals did not originate in the covered countries or are from scrap or recycled sources; or (2) that the company has no reason to believe that the minerals may have originated in the covered countries and may not be from scrap or recycled sources, then the company must disclose its determination, provide a brief description of the inquiry it undertook, and the results of the inquiry on a new Form SD filed with the Commission.

The company also would be required to make its description publicly available on its Internet website and provide the Internet address of that website in the Form SD. Under the final regulation, companies that are required to file a Conflict Minerals Report would need to exercise due diligence on the source and chain of custody of their conflict minerals.

Conflict minerals regulations. The final regulations became effective on November 13, 2012, and the first required reports and disclosures must be filed with the SEC by May 31, 2014. Ultimately, the SEC declined to adopt any categorical de minimis exception as part of the final rules.

Peter Keisler, counsel for the business group, argued that the SEC has misconstrued the statute. The Commission greatly magnified the cost of the statute by misconstruing Sec. 1502 and rewriting a crucial standard. Section 1502 uses the language conflict minerals that “did originate” in the Democratic Republic of the Congo (DRC), while the SEC regulations use “may have originated.” The SEC changed “did” to “may,” said Keisler. Section 1502 requires companies to file a conflict minerals report if the conflict minerals “originated” in the DRC, he continued, while the SEC rules say, “may have originated.” Thus, he argued that the mere possibility could trigger “may have originated.”

Keisler also contended that a de minimis exception is particularly compelling here, where the application of the rules can impose massive costs without achieving the desired objective, but the SEC said that any de minimis exception would be contrary to the legislative intent. Congress authorized the SEC to grant a de minimis exception, Keisler averred, and this area cries out for a de minimis exception.

However, on questioning from Judge Sentelle, Keisler conceded that there is no reported case striking down an agency regulation for not including a de minimis exception.

Judge Randolph pointed out the SEC’s conclusion that small uses of these minerals could be significant. Keisler argued for a per company de minimisexception as a good solution.

This is a shaming statute, emphasized Keisler, a “scarlet letter” designed to affect a broader public debate. Judge Srivanasan countered that because of the statute, potential investors receive information about the company.

In response to the business association’s arguments, Hardin noted that the Commission had to make discretionary decisions when implementing Sec. 1502, adding that it reasonably interpreted the statute. Hardin contended that the SEC’s reporting trigger is not contrary to the terms of the statute and that there is nothing unreasonable about the SEC’s interpretation. The “may have originated” language triggers an obligation to move on to due diligence.

Section 1502 was silent on how a company determines that its minerals originated in a conflict jurisdiction.

Judge Sentelle noted that the website posting required by the SEC regulations is a regulation of speech and should not go beyond a statutory requirement just because the Commission thinks Congress wanted this. This is compelled speech, he said.

To Judge Randolph’s query on the statutory objective, Hardin replied that the objectives of Sec. 1502 are to promote peace and security in the DRC and to increase public awareness of the use of conflict minerals. The judge questioned how website disclosure would help decrease the use of conflict minerals. Responding to a question on how the SEC will enforce the conflict minerals regulations, Hardin declared that the SEC would review disclosures periodically, and there would be a Rule 10b-5 requirement.

This case is No. 13-5252.

Attorneys: Tracey Hardin for the SEC. Peter Keisler (Sidley Austin LLP) for the National Association of Manufacturers.

Companies: Chamber of Commerce; Business Roundtable; National Association of Manufacturers

MainStory: TopStory DoddFrankAct DistrictofColumbiaNews NewLawsuitsNews InternationalNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.