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From Securities Regulation Daily, November 1, 2013

Senators and House members back SEC in Dodd-Frank conflict minerals case

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

Three U.S. Senators and nine current and former House members filed an amicus brief asking the DC Circuit to affirm a district court ruling that SEC regulations implementing the conflict minerals disclosure mandate in Section 1502 of the Dodd-Frank Act were properly adopted. The court held that the SEC’s decision not to include a de minimis exception in the regulations was rationally based upon the evidence before the agency. In an amicus brief, the federal lawmakers argued that the conflict mineral regulations are working as Congress intended. Moreover, Section 1502 and the SEC implementing regulations are an important part of a harmonized global framework.

The amici asserted that Congress enacted Section 1502 to further the foreign policy and national security interests of the United States and that the SEC has adopted final regulations consistent with congressional intent. Furthermore, the regulations have garnered praise and swift compliance here and abroad. For example, European Union Trade Commissioner Karel De Gucht recently praised the U.S. approach to conflict mineral regulation. Commissioner De Gucht announced that his office is developing an initiative on conflict minerals that builds on the U.S. efforts.

The brief was signed by Senators Barbara Boxer (D-Cal.), Richard J. Durbin (D-Ill.), and Ed Markey (D-Mass.), former Representative Howard Berman (D-Cal.), and current Representatives William Lacy Clay (D-Mo.), Keith Ellison (D-Minn.), Eliot Engel (D-N.Y.), Raul Grijalva (D-Ariz.), John Lewis (D-Ga.), Jim McDermott (D-Wash.), Gwen Moore (D-Wis.), and Maxine Waters (D-Cal.), the Ranking Member on the House Financial Services Committee.

De minimis determination. determination. The amici contended that the SEC correctly determined that a de minimis exception was not appropriate. After considering comments from industry groups, the SEC concurred with Congress. It concluded that because conflict minerals are often used in minute quantities, a de minimis exception would have a significant impact. Indeed, a de minimis exception would have created a loophole that would have swallowed the rule.

Moreover, the SEC recognized that Congress intentionally did not adopt a de minimis exception. Instead, Congress selected a different threshold, which is whether a mineral is necessary to a product’s functionality or production. Although the SEC believed it had the authority to create a de minimis exception, Congress had already determined such an exception would not be in the public interest, and it had explicitly chosen a different standard.

Congress considered and rejected a de minimis exception when drafting Section 1502. The brief revealed that a draft de minimis standard was circulated among congressional offices. The draft was discussed extensively among industry, policy experts, and administration officials, but it was not adopted because creating a de minimis exception for these minerals would have subverted the goals of the law. Indeed, no member of Congress even offered a de minimis amendment.

Because conflict minerals are used in small quantities, whether measured by weight or monetary value, a de minimis exception would have exempted an unacceptably large portion of the overall market from the statute’s requirements. The amici contended that because Congress specifically rejected a de minimis exception, the SEC correctly decided not to create one.

Reason to believe standard. The brief also argued that the SEC’s “reason to believe standard” is consistent with congressional intent. Section 1502 requires annual reporting from companies that use conflict minerals that did originate in the Democratic Republic of Congo (DRC) or an adjoining country. Whether a conflict mineral “did originate” in the DRC is a question of objective fact that exists independently of a company’s knowledge or ignorance of the mineral’s origin.

The SEC regulations require due diligence if the company knows or has reason to believe that it has used “necessary” conflict minerals that originated in the covered countries. The “reason to believe standard” is satisfied when the company encounters red flags, warning signs, or other circumstances indicating that the company’s minerals have originated in a covered country. Conversely, companies who have no reason to believe that their minerals originated in the DRC do not need to take the additional due diligence steps. The brief contends that the SEC regulations promote the congressional goals of transparency and accountability.

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