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Thursday
Oct312013

The SEC Files Its Brief in the Appeal of the Conflict Minerals Rule

We have been following the progress of the conflict minerals rule (“Rule”)—the Rule implementing Section 1502 of Dodd-Frank that requires certain disclosures of the use of “conflict minerals” sourced from the Democratic Republic of Congo.  After the Rule was initially proposed it was challenged by the National Association of Manufacturers and others.  After some jurisdictional maneuvers the United States District Court for the District of Columbia in an opinion by Robert Wilkins, upheld the Rule, granting the SEC summary judgment.  That decision was appealed. On October 23rd the Securities Exchange Commission filed its brief in that proceeding.

In its brief the SEC criticized strongly the appellant’s arguments, stating that their challenges are premised on the novel and flawed assumption that the Commission should have re-evaluated Congress’s determination that the disclosures would ameliorate, rather than exacerbate, the crisis in the DRC. This erroneous contention animates appellants’ arguments that the Commission was required to use its exemptive and interpretive authority to reduce the statute’s costs even where the Commission reasonably concluded that doing so would undermine Section 1502’s purpose. It also underpins their arguments that the Commission could not implement Congress’s directive unless it confirmed Congress’s judgment that the statute would yield benefits, and that each regulatory choice made by the Commission had to be weighed against its ultimate effect in the DRC. Appellants’ position misconceives both the Commission’s role in mandatory Rulemakings and its approach to this Rulemaking.

The SEC addressed the central issues of the appeal, considering whether it acted reasonably in declining to include a de minimis exception to the Rule, whether its economic analysis complied with the Administrative Procedure Act and the 1934 Securities Exchange Act; and whether Section 1502 and the SEC Rule violate the First Amendment by mandating that issuers disclose factual information about their products.  In each case (no surprise) the SEC argued that it had acted appropriately and in full compliance with all statutory requirements.

What is most interesting in the brief is the repeated reference to Congressional mandate and the mandatory nature of this Rule.  It has been known from the start that the SEC was not thrilled to be tasked with crafting conflict mineral disclosure regulations but clearly had no option but to do so given Dodd-Frank Section.  Unlike some other Rule-making directives, Section 1502 left the SEC very little discretion, a fact the brief points out repeatedly.  For example, appellants argue that the SEC should have determined whether the Rule would further the stated goal of reducing violence in the DRC.  In response the SEC notes

In enacting Section 1502, Congress determined that the required disclosures will benefit the DRC. The Commission properly declined to second-guess that judgment and instead weighed whether its choices would provide the disclosure that Congress determined would further its humanitarian goals.

And far from pursuing these goals at all costs, as appellants assert, the Commission expressly endeavored to “reduce the burden of compliance … while remaining faithful to the language and intent of Section 1502.” In the few circumstances where the Commission did not accept recommendations to lower costs, it determined that the recommended alternatives would undermine the scheme Congress envisioned. These conclusions were reasonable in light of the statutory language, congressional purpose, and evidence in the administrative record. And given Congress’s mandate, the Commission’s analysis was appropriate under the Administrative Procedure Act (“APA”) and the Exchange Act.

The SEC took the same position (Congress made us do it) with regard to one of the fiercely debated aspects of the Rule--its failure to include a de minimis exception.  Appellants argued that a de minimis exception was appropriate because Congress did not “expressly prohibit” it and therefore the Commission had inherent authority to create one. In its brief, the SEC argues that the language and structure of Section 1502 showed that Congress did not intend for there to be such an exception because it did not include it in Section 1502 while it did include an express de minimis threshold in an analogous reporting provision of Dodd-Frank.

With regard to the First Amendment objections raised by appellants, the SEC once again referred directly to Congressional directive, stating that the Rule

requires the “disclosure of economically significant information designed to forward ordinary regulatory purposes.” Pharm. Care Mgmt. Ass’n v. Rowe, And courts have found it “neither wise nor constitutionally required” to subject the “[i]nnumerable federal and state regulatory programs [that] require the disclosure of product and other commercial information” to “searching” First Amendment scrutiny. Nat’l Elec. Mfrs. Ass’n v. Sorrell,  And because requiring issuers to disclose the products that have not been found to be DRC conflict free is reasonably related to Congress’s goal of promoting peace and security in the DRC,  [the] Rule …survives review.

The agency noted that even if some heighted scrutiny applied, the Rule would pass muster because it “directly and materially advance a substantial government interest in a narrowly tailored manner.” R.J. Reynolds Tobacco Co. v. FDA.  In support of this argument, the SEC noted that “Congress stated explicitly that the violence in the DRC “warrant[ed]” Section 1502’s disclosure provision. “

This is simply an overview of the SEC’s arguments.  Common to all however is the bottom line position that “Congress made us do it” and that in light of congressional mandates the agency did the best it could.    Oral argument has not yet been scheduled in the appeal.  Regardless of the ultimate outcome, the case continues to highlight the problems facing disclosure regulation today.  The SEC is being asked to craft disclosure regulations under non-discretionary mandate from Congress in areas that have little to do with the agency’s core mission or competence.  The result is problematic regulations that end up tied up in extensive litigation.  Surely there is a more efficient and effective way to proceed.

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