FROM: SECURITIES AND EXCHANGE COMMISSION
Joint Statement on the Conflict Minerals Decision
Commissioners Daniel M. Gallagher and Michael S. Piwowar
April 28, 2014
On April 14, 2014, the D.C. Circuit decided that requiring issuers to describe certain of their products as not DRC conflict free violated the First Amendment.[1] It remanded the case to the district court to determine how much of the Commission’s conflict minerals rule is therefore unconstitutional. We believe that the entirety of the rule should be stayed, and no further regulatory obligations should be imposed, pending the outcome of this litigation. Indeed, a stay should have been granted when the litigation commenced in 2012.
A full stay is essential because the district court could (and, in our view, should) determine that the entire rule is invalid.
First, the First Amendment concerns permeate all the required disclosures, not just the listing of products that have not been determined to be DRC conflict free. As the D.C. Circuit noted, an issuer is required “to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups.”[2] A limited modification to our rule eliminating the requirement to declare certain products as “not DRC conflict free” would fail to fully address the First Amendment violation. For example, the fact that an issuer would still be required to include a description of its due diligence procedures in its reports would suggest that the issuer may have “blood on its hands” for its products since it is sourcing certain minerals from the DRC. Moreover, current staff guidance restricts an issuer from stating that its products are not indirectly financing or benefiting armed groups in the DRC in the absence of a costly independent private sector audit report.[3]
Second, even assuming that the due diligence disclosures standing alone do not implicate First Amendment concerns, we believe that the “name and shame” approach is at the heart of not only the Commission’s rule, but of Section 1502 of the Dodd-Frank Act itself. The disclosures about the due diligence process are not themselves sufficient to achieve the benefits that Congress sought to advance. Rather, it is the listing of products—the apotheosis of the diligence process—that is central to the rule. Thus, disclosures about the due diligence process should not be seen as severable from the unconstitutional scarlet letter of not DRC conflict free.
A finding that the entire rule is invalid, and that the invalidity is rooted in the statute, would permit Congress to reconsider whether Section 1502 achieves the benefits that it was supposed to attain. Unfortunately, the evidence is that it has been profoundly counterproductive, resulting in a de facto embargo on Congolese tin, tantalum, tungsten, and gold, thereby impoverishing approximately a million legitimate miners who cannot sell their products up the supply chain to U.S. companies.[4] Reconsidering Section 1502’s core approach would also save investors billions of dollars in compliance costs,[5] and ease the problem of information overload by eliminating special interest disclosures that are immaterial to investment decisions.
Perhaps the District Court will not ultimately agree with us, and will permit some portion of the Commission’s rule to continue in force. But given the uncertainty, the wisest course of action would be for the Commission to stay the effectiveness of the entire rule until the litigation has concluded. Marching ahead with some portion of the rule that might ultimately be invalidated is a waste of the Commission’s time and resources—far too much of which have been spent on this rule already—and a waste of vast sums of shareholder money. A full stay of the effective and compliance dates of the conflict minerals rule would not fix the damage this rule has already caused, but it would at least stanch some of the bleeding.
[1] Nat’l Ass’n of Mfgrs v. SEC, No. 13-5252 (D.C. Cir. Apr. 14, 2014).
[2] Id. at 20.
[3] Division of Corporation Finance, Frequently Asked Questions on Conflict Minerals, available at http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm (Question 15).
[4] See, e.g., The Unintended Consequences of Dodd-Frank’s Conflict Minerals Provision, Hearing before the Subcommittee on Monetary Policy and Trade of the U.S. House Committee on Financial Services, No. 113-23 (May 21, 2013).
[5] The Commission estimated compliance costs at $3–4 billion for initial compliance, and $207–609 million per year thereafter. See Rel. 34-67716, Conflict Minerals (Aug. 22, 2012) at 302.
