Amicus Briefs Filed in Conflicts Minerals Case Provide Multiple Arguments Against the Rule

Amicus briefs are being filed in the case challenging Section 1502 of Dodd-Frank and the SEC rule implementing that section (the “conflict minerals rule).  To date, the briefs support the petitioners seeking to overturn the final SEC rule on the ground that it is arbitrary and capricious.  Each brief alleges that the SEC failed to conduct sufficient analysis of the impact of the conflict minerals rule, as required by law. Specifically, the premise of each brief proceeds from a charge that in drafting its final rule implementing the conflict minerals rule:

the SEC had a “statutory obligation to determine as best as it can the economic implications of the rule.” Business Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011). As this Court has repeatedly explained, “the Commission has a unique obligation to consider the effect of the new rule upon 'efficiency, competition, and capital formation' ... and its failure to 'apprise itself –and hence the public and the Congress - of the economic consequences of a proposed regulation makes promulgation of the rule arbitrary and capricious and not in accordance with law.” Id. (citing cases); see also American Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 176-79 (D.C.).  By its own admission the SEC has failed to fulfill this statutory obligation. The Commission acknowledged that it did not conduct any analysis of the specific costs or benefits of the numerous decisions made by the Commission in determining which products and markets would be within the scope of the [conflict minerals rule] due diligence and reporting requirements. In its discussions of the “benefits and costs resulting from the Commission's exercise of discretion” the Commission instead stated: “We are unable to quantify the impact of each of the decisions we discuss below with any precision because reliable, empirical evidence regarding the effects is not readily available to the Commission, and commentators did not provide sufficient information to allow us to do so.” Conflict Minerals Rule, 77 Fed. Reg. 56,274, 56342 (Sept. 12, 2012).

Each brief then assets very different arguments as to why the analysis done by the SEC was insufficient.  One brief, filed by a group representing an industry coalition consisting of among others, the American Coatings Association, Inc., the American Chemistry Council, the Can Manufacturers Institute, the Consumer Specialty Products Association and the National Retail Federation, focuses on the alleged failure of the SEC to assess adequately the costs the conflicts minerals rule would impose upon a broad swath of industry participants and other users (however inadvertently) of conflict minerals.  Its brief, available here stresses, among other points, that by failing to allow a de minimus exception to the rules disclosure requirements, the SEC imposed “wholly unreasonable and burdensome requirements on manufacturers who do not make significant use of conflict minerals in their products, but whose products may (or may not) contain trace elements of such minerals (which most often will not originate in the Congo) as a result of manufacturing processes (e.g., the use of catalysts) employed by third party suppliers of ingredient materials at one stage, or more, in long upstream supply chains.”  The brief provides examples of ways in which the conflict minerals rule may impose

wholly unreasonable and burdensome requirements on manufacturers who do not make significant use of conflict minerals in their products, but whose products may (or may not) contain trace elements of such minerals (which most often will not originate in the Congo) as a result of manufacturing processes (e.g., the use of catalysts) employed by third party suppliers of ingredient materials at one stage, or more, in long upstream supply chains.

The second brief, filed by a group of experts on the Democratic Republic of the Congo (“DRC”) available here focusses its arguments not on the economic impact the conflict minerals rule will have on issuers subject to its requirements, but on the impact the rule will have within the DRC.  The thrust of the argument is that the final rule as drafting by the SEC not only increases the burdens imposed by Section 1502 without warrant, but also reduces the rule’s chances of undermining armed groups in the DRC.

The experts assert that

Based on their expertise, amici believe that the SEC erred in failing to consider whether its final rule would advance Section 1502’s objective of weakening armed groups in the DRC. They further believe that the SEC compounded that error by exercising its discretion in ways that render its rule more likely to harm legitimate economic activity.

The brief assets that Section 1502 has caused the collapse of the market for anything but verifiably “conflict-free” minerals and has also had the perverse effect of further undercutting traceability programs and encouraging smuggling. Pressure to produce certifiably “conflict free” minerals has created more incentives to corrupt traceability initiatives, for instance by using stolen “conflict-free” tags.

Under the conflict minerals rule, according the experts, the costs of complying with the rule will incentivize companies to avoid being subject to compliance requirements and seek minerals elsewhere. They state that “[a]s the SEC acknowledged, “[t]he high cost of compliance provides an incentive for issuers to choose only suppliers that obtain their minerals exclusively from outside the [DRC and its neighbors], thereby avoiding the need to prepare a Conflict Minerals Report.”

There may well be more amici briefs to come and many more arguments raised both in support of and in objection to the conflict minerals rule.  At this point, the voices against the rule are sounding the loudest.