Judges challenge U.S. SEC over 'conflict minerals' rule

WASHINGTON Tue Jan 7, 2014 7:00pm GMT

WASHINGTON Jan 7 (Reuters) - Two U.S. judges on Tuesday raised concerns about a new rule that forces certain manufacturers to disclose if their products contain minerals from a war-torn part of Africa, questioning the rule's purpose and whether it tramples companies' free speech.

The U.S. Securities and Exchange Commission was required to draft the rule as part of the 2010 Dodd-Frank Wall Street reform law. Human rights groups convinced lawmakers to tuck in the provision, in an effort to empower consumers who want to avoid products that encourage mining in areas gripped by rebel violence and humanitarian conflict.

The measure requires companies to determine if certain types of minerals, in products such as laptops and car parts, may have originated from the Democratic Republic of the Congo (DRC) region.

The results of the inquiry into the minerals' origin also must be disclosed to the SEC and posted on company websites.

The forceful questioning on Tuesday by a majority of the three-panel U.S. Court of Appeals for the District of Columbia Circuit was at times sympathetic to the concerns of three business trade groups, including the U.S. Chamber of Commerce, who challenged the SEC's "conflict minerals" rule.

The groups are seeking to have it overturned and rewritten in a less strict form.

They argue the current rule imposes too many costs, goes beyond congressional intent and violates First Amendment freedoms by forcing companies to condemn their own products.

"This is a shame statute," said attorney Peter Keisler, a partner at Sidley Austin who argued the case for the Chamber, the Business Roundtable and the National Association of Manufacturers. "This is a scarlet letter statute."

The free speech and congressional intent arguments took center stage during the court hearing, with one judge saying the rule forces companies to speak against their will, and another worrying whether the rule could pave the way for even more onerous corporate disclosures in the future.

"This is regulation of speech," said Judge David Sentelle, who asked SEC attorney Tracey Hardin to read the Dodd-Frank statute aloud and then told her the rule's disclosure requirements appear to go beyond what the law requires.

"This is compelled speech," he added.

Judge A. Raymond Randolph, meanwhile, asked questions about the objective of the rule, and whether it was intended to fuel boycotts of products, convince investors not to buy stock in certain companies or "stigmatize the companies."

Hardin told him the main goal of the measure is to "promote peace and security" in the DRC region and increase public awareness of the sourcing of the minerals, saying the trade of tantalum, tin, gold or tungsten is "fueling and funding a conflict."

"There seems to be a slippery slope problem here," Randolph said. "Under your First Amendment theory...could Congress say that all companies now have to report the conditions under which their products are manufactured overseas, what the pay rate is, whether they are using child labor?"

"Is that the next step here?"

FIRST REPORT DUE SOON

Human rights groups say that the conflict minerals regulation already has acted as a catalyst for reform of the minerals trade in the region and prompted both U.S. and Congolese companies to examine the sourcing policies in their supply chains.

"The aggressive campaign led by the industry associations against the law threatens this progress and indicates the lengths the most powerful U.S. industry groups are prepared to go to continue business as usual," said Global Witness, which campaigns against environmental and human rights abuses, in a written statement after the hearing.

The judges did not indicate a timeline for when they may rule. Despite the pending litigation, the SEC is still planning to require companies to submit their first conflict minerals report for the year 2013 by the end of May.

Tuesday's case marks the second time that the SEC defended the conflict minerals rule in federal court.

In July, a lower U.S. court upheld the rule, marking a rare victory for the SEC, which over the last decade has lost multiple legal challenges to its rules.

Should the SEC ultimately lose the case on appeal, it would mark the third loss in a legal challenge to a Dodd-Frank securities rule, and the second loss on a rule specifically championed by humans rights groups.

The other Dodd-Frank rule, which was tossed out by a federal court in July, forced oil, gas and mining companies to disclose payments they make for resource projects to foreign governments.

The SEC decided not to appeal the judge's decision, and instead opted to redraft the rule at a later date to address all of the judge's concerns. (Additional reporting by Stella Dawson; Editing by Karey Van Hall and Bernadette Baum)

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