The SEC recently filed its initial brief in the case pending in the United States Court of Appeals for the D.C. Circuit in which the National Association of Manufacturers, United States Chamber of Commerce, and Business Roundtable (collectively, the "petitioners") are seeking to strike down the SEC's conflict minerals rule adopted on August 22, 2012.
The rule is mandated by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 13(p) to the Securities Exchange Act of 1934 and requires the SEC to issue rules requiring issuers to disclose their use of certain conflict minerals (e.g., gold, columbite-tantalite, cassiterite, wolframite and their derivatives) originating from the Democratic Republic of the Congo or an adjoining country (collectively, the "covered countries") on a new Form SD beginning May 31, 2014, and continuing on May 31 every year thereafter.
The petitioners have argued, among other things, that: (1) the SEC failed to evaluate and quantify the economic impact of the rule, which the petitioners allege is significant; (2) the SEC failed to provide a de minimis exception for issuers using small amounts of conflict minerals; (3) the SEC overreached by including issuers who contract to have products manufactured that might contain conflict minerals but are not manufacturers; (4) the two- and four-year transition periods for large and small issuers, respectively, are backwards; and (5) Section 1502 and the rule violate the First Amendment.
The SEC's initial brief asserts that the SEC's analysis when designing the rule was completely reasonable and responds to the petitioners' arguments regarding the depth of the SEC's analysis by arguing that:
- the SEC engaged in extensive qualitative analysis of its discretionary choices when creating the rule, which included evaluating more than 420 individual comment letters and 13,000 form letters, and accurately estimated the rule's quantitative costs
- although the SEC can estimate costs of compliance, a qualitative rather than quantitative analysis is more feasible and appropriate because the ultimate benefits of the rule are intangible and currently unquantifiable
- other federal offices, such as the State Department and comptroller general, rather than the SEC are statutorily required to examine and quantify the effectiveness of Section 1502 and the rule
- the SEC must defer to Congress' determination that humanitarian relief for the covered countries is necessary and must neither undermine the congressional mandate of Section 1502 nor unilaterally create exceptions that contradict it
With respect to the petitioners' arguments concerning the absence of a de minimis exception, the inclusion of issuers who contract to manufacture products (rather than solely manufacturers), and the length of the transition periods, the SEC asserts:
- adding a de minimis exception to the rule would contradict Congress' intent because Congress considered, but deliberately omitted, a de minimis exception for Section 1502
- a de minimis exception is also inappropriate because small, individual uses of conflict minerals can have a large impact
- Congress (and ultimately the SEC) reasonably included issuers who contract to manufacture rather than solely manufacturers because manufacturers could otherwise evade the rule by contracting around disclosure requirements
- conflict minerals are commonly used in products that are manufactured by one company and branded, marketed, and sold by other companies further down the supply chain, so requiring only the manufacturer to comply with the rule would frustrate the purpose of Section 1502
- providing a longer transition period for small issuers than large issuers (two years for small issuers, four years for large issuers) is warranted because large issuers have greater leverage over suppliers and more resources at their disposal to evaluate and refine their supply chains in a shorter period of time
Finally, the SEC seeks to refute the petitioners' assertions that Section 1502 and the rule violate the First Amendment by arguing:
- mandatory disclosures of factual information do not violate First Amendment rights
- Section 1502 is different than other laws that have been found to violate First Amendment rights, such as laws requiring a person to express or subsidize a message with which the person disagrees, laws requiring speakers to alter the content of speech, and laws infringing on rights of political association or belief
- fear of stigmatization stemming from required factual disclosures does not substantiate a First Amendment violation
- the SEC went to great lengths to avoid burdening free speech, including curtailing disclosure requirements, allowing additional disclosure, and providing the two and four year transition periods to large and small issuers, respectively
Oral arguments in the case are scheduled for May 15, 2013.