Friday, January 30, 2015

Court Expedites Business Challenge Of SEC Conflict Minerals Regulation

Posted: November 28, 2012

The U.S. Court of Appeals for the District of Columbia Circuit this week heeded the request of three business groups to expedite their challenge of a Securities and Exchange Commission (SEC) rule requiring firms to file reports ensuring that their sourcing methods for four specific minerals are not fueling conflict in central Africa.

The U.S. Chamber of Commerce, Business Roundtable (BRT) and National Association of Manufacturers (NAM) made the request to expedite the proceedings on Nov. 21, and the motion was granted Nov. 27. The court also laid out the briefing schedule for the case, with petitioners' briefs due Jan. 16 and respondent briefs due March 1. Final briefs in the case are then due March 28.

The business groups pushed the court to expedite its proceedings because they are hoping to secure a legal victory before the most burdensome aspects of the SEC rule take effect. For instance, the first conflict minerals reports that companies must file pursuant to the SEC rule are due by May 31, 2014, and these business groups are hoping that they can secure a legal victory excusing them from the obligation of filing such reports before they are due.

A delay in the legal proceedings would have caused U.S. companies "irreparable injury because implementation of the rule will impose extraordinary costs on them," the groups wrote in their motion to expedite.

With the expedited briefing schedule in hand, the business groups are hoping to complete the litigation before the end of 2013, well ahead of the May 31, 2014, due date. To make that happen, one business source said the groups are aiming to get at least the initial briefing phase completed before the court recesses in June. The SEC did not challenge the groups' effort to expedite the proceedings.

In the nearer term, U.S. companies will have to take preliminary measures in order to guard against the possibility of failure as the court proceedings advance beyond the preliminary stages. For instance, the first "compliance period" under the SEC rule -- meaning the first time that a company would be liable for failure to adhere to it -- kicks off on Jan. 1, and the groups say their companies are already incurring the costs of preparing to comply starting from that date.

On Nov. 21, the petitioners also circulated their preliminary statement of issues, which outlines their main complaints against the regulation. The regulation was approved by the SEC in August as part of the implementation of the Dodd-Frank Act, and while the petitioners filed their petition to review the rule in October, they have not previously offered any substantive arguments in writing (Inside U.S. Trade, Nov. 9).

Among other arguments, the business groups charge that the SEC's economic analysis for the rule was "grossly inadequate" and violates two separate provisions of the Securities Exchange Act.

First, they believe the economic analysis runs afoul of the portion of the Securities Exchange Act that requires the SEC to determine "whether an action is necessary or appropriate in the public interest." Further, they believe the economic analysis is in violation of the portion of the statute that stipulates the SEC "shall not adopt any such rule or regulation which would impose a burden on competition not necessary or appropriate."

According to the business groups, the rule violates these provisions because the SEC "never estimated the benefits of the Rule and even acknowledged that there might be no benefits at all." They also point out that, by the SEC's own estimate, "initial compliance will cost companies $3 to $4 billion, and annual compliance will cost an additional $200 to $600 million per year."

The motion submitted by the business groups adds in a footnote that several observers even believe that these estimates are low, and that the true cost of compliance could be anywhere from $8 billion to $16 billion.

In its challenge of the economic analysis, one business source said the petitioners are likely to lean on a 201l case in the same court in which the Chamber and BRT successfully challenged SEC's so-called proxy access rule. In that case, the court found that SEC "inconsistently and opportunistically framed the costs and benefits of the rule."

The petitioners also claim that the SEC failed to evaluate the impact of the regulation on small entities, in violation of the Regulatory Flexibility Act. Moreover, it alleges that a wide swath of the SEC's final rule is "erroneous, arbitrary and capricious, or an abuse of discretion," as enshrined in the Administrative Procedure Act.

In particular, the groups take issue with the portion of the SEC rule that covers companies who "contract to manufacture" certain products as opposed to just the manufacturing companies themselves. They believe that such an expansive interpretation goes against the intent of Congress when passing the Dodd-Frank Act.

The groups also take issue with the way in which the SEC altered terminology regarding the four covered minerals. The statute itself requires covered companies to identify the four minerals that "did originate in the Democratic Republic of the Congo or an adjoining country." In the rule, the SEC altered this terminology to cover minerals that registrants have "reason to believe … may have originated in the Democratic Republic of the Congo or an adjoining country."

Another key aspect of the challenge by the Chamber, NAM and BRT is that the law itself violates the First Amendment because it "compels speech … by forcing companies to state that … their products are not 'DRC conflict free.'" A business source cited cases challenging certain packaging regulations as examples of successful First Amendment challenges with regard to compelling speech.

In February, Judge Richard Leon of the U.S. District Court for the District of Columbia sided with tobacco companies in their challenge of graphic warning labels mandated by the Food and Drug Administration. This case also dealt with the First Amendment rights of companies.

On Nov. 19, Amnesty International USA (AIUSA) filed to become a respondent-intervenor in the case, which was approved by the court on Nov. 27. AIUSA noted that it has investment and business interests at stake in the enforcement of the conflict minerals rule and is "committed to an investment philosophy that respects and enhances its efforts on behalf of human rights."

AIUSA noted that it will use the disclosures required by the rule to apply its existing policy of screening out reserve account investments in companies with operations that may perpetrate or be complicit in grave human rights abuses. It will also use the disclosures to inform its shareholder advocacy and corporate governance activities.

If the conflict minerals rule or the statute underlying it were invalidated, it "would harm AIUSA's interest in making financially sound and socially responsible investments and its interest in participating as a shareholder," it argued.

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