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DC Circuit Rejects SEC Rule on “Conflict Minerals”

The DC Circuit rejected the SEC’s rule requiring companies to disclose whether their products contain minerals from the Congo.  The rule arose out of the Dodd-Frank Act which directed the SEC to issue regulations requiring firms using “conflict minerals” to investigate and disclose the origin of those minerals.  This requirement was prompted by the catastrophic conditions in the Democratic Republic of the Congo (“DRC”), where armed groups have financed their war operations by exploiting minerals found in the Congo. 

The SEC adopted the regulations implementing the Dodd-Frank mandate in 2012.  The SEC regulation would have required companies to disclose if particular products have “not been found to be DRC conflict free.”  (The words “DRC conflict free” are taken from the Dodd-Frank Act.)

In its adopting release, the SEC estimated that the total initial cost to implement the rule would be $3 to $4 billion.  The agency noted that it was “unable to readily quantify” the “compelling social benefits” from the rule, explaining that it could not “assess how effective” the rule would be in achieving any benefits.  The National Association of Manufacturers, Business Roundtable and the US Chamber of Commerce challenged the rule on its scope and costs.

While the lower court initially ruled for the SEC, the Court of Appeals for the DC Circuit overturned the portion of the rule that would require issuers to disclose when products have “not been found to be DRC conflict free.” 

Unlike the SEC’s past cases before the DC Circuit, the Court did not take issue with the cost-benefit analysis despite the lack of precision in estimating the rule’s benefits.  The Court stated, “[h]ere, the rule’s benefits would occur half-a-world away in the midst of an opaque conflict about which little reliable information exists, and concern a subject about which the Commission has no particular expertise.”

Instead, the Court struck down the disclosure provision of the SEC’s rule on First Amendment grounds.  The DC Circuit disagreed with the SEC’s argument that the disclosure – whether a product was “conflict free” – was merely factual, saying that “[p]roducts and minerals do not fight conflicts.”  Rather, the Court noted, the phrase “conflict free” serves as “a metaphor that conveys moral responsibility for the Congo war.”  Such a declaration requires an issuer to disclose that its products are “ethically tainted, even if they only indirectly finance armed groups.”  The Court concluded, “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”