If they succeed, attempts by business groups to overturn the SEC rule on conflict minerals could come back to bite their members.
By Brad Brooks-Rubin
The classic song “I Fought the Law” has been played by dozens of bands. Originally written in 1958 by a member of Buddy Holly’s band The Crickets, the 1965 version by the Bobby Fuller Four is the one most people know. In the original tune, when the singer fights the law, the law wins.
In 1987, the legendary punk band the Dead Kennedys redid the song. And, as it should be in a good punk song, it is the singer who wins.
SEC Ruling On Due Diligence, Conflict Minerals
This question of “who wins” when fighting the law (or, a law, in this case) came to my mind when reading the various stories about the recent D.C. Circuit Court of Appeals arguments in the litigation challenging the SEC’s rule implementing Section 1502 of the Dodd-Frank Act related to conflict minerals (if you need a summary of the rule, an SEC fact sheet is here).
Business Group Appeals Initial Loss On Suit To Overturn Ruling
Given the broad impact and enormous projected compliance costs, a number of trade associations sued the SEC in October 2012 to overturn the rule, arguing among other things that the SEC regulations underestimated compliance costs, improperly failed to include a de minimis amount of these minerals, failed to consider fully whether the rules would actually benefit the DRC, and violated the First Amendment by compelling speech through certain public disclosures.
In late July 2013, U.S. District Court Judge Robert Wilkins granted summary judgment in favor of the SEC. Although Judge Wilkins acknowledged that the many of the Plaintiffs' arguments were reasonable—for example, there may well have been a de minimis threshold that the SEC could have implemented— he found that the SEC's decision to act otherwise was not “arbitrary and capricious,” which is the operative standard in reviewing agency conduct.
Finally, and perhaps most importantly, Judge Wilkins held that the SEC was not required to demonstrate conclusively that the rule would meet its stated humanitarian objectives, but rather could rest on Congress' determination.
The Plaintiffs appealed this decision, and it has been widely reported that the oral argument held in early January potentially revealed a skepticism among the Circuit Court judges. In particular, according to one detailed account of the hearing, two of the judges focused especially on the First Amendment implications of requiring companies to post information on their websites concerning whether minerals in the supply chain “may have originated” in the DRC or a neighboring country.
Implementing Regulations At Risk
But what really happens if some or the entire SEC rule is set aside? Even if the impetus for the lawsuit is more than understandable, can it be called a win for those who fought the law (or at least the regs)?
There are undoubtedly real questions about the process through which 1502 became law and some of the ways in which it is drafted, and I do not question here the merits of the arguments against 1502. But almost no one expects the court to overturn the entirety of the provision; it will only be the implementing regulations that are impacted, thereby sending the SEC back to the drawing board and taking all of us back to the situation pre-August 2012, when we had a law but no specifics as to how it should be implemented.
Consequences For Companies
What might that lead to for companies?
- Reviving uncertainty. When I was among those in the middle of this issue at the State Department, the message we heard the most from companies was “We want to do the right thing. So tell us what to do, and we’ll do it.” I believe this to be true of most companies on this issue. And although the 1502 rule may not be perfect, the rules are in place and, slowly but surely, companies are adapting and implementing them. If the lawsuit prevails, companies will return to a situation where their personnel, their customers, and their suppliers do not know what the rules of the road are.
- Increasing Costs. Sending the rule back to the SEC will mean that it is likely some or all of those efforts will need to be scrapped/revised/duplicated to deal with a revised rule. Not only will companies face an extended period of not knowing what it is they will be told to do, there will be increased costs while they wait for the new rule, and almost certainly expanded costs to adapt to a new rule, especially as the European Union (see below) may also have acted in the interim with its own measure.
- Ignoring the Gains of 1502. Many companies that have completed the process of understanding and implementing the 1502 rule are beginning to see indirect gains in other aspects of their supply chain management. Respected auditor Lawrence Heim (who understands 1502 about as well as anyone) describes many of those gains. Few companies would choose to undertake a comprehensive review of all of their suppliers in the way 1502 prescribes, but once they begin, many find out much more about how their supply chain could work more efficiently and cost-effectively.
- Missing the Broader Trend. As I have written elsewhere, section 1502 is one piece of a much larger shift from compliance regimes based on more absolute approaches, such as sanctions or boycotts, to one of responsible engagement through due diligence. Not only is 1502 now one of the “on the shelf” examples that regulators and policymakers will likely turn to for future reporting mechanisms, it is a prompt for companies to understand how their supply chains can be assessed and, in some cases, redirected through a lens of responsible conduct. Even if set aside now, these efforts will surely come back through other models and issues – possibly even through the European Union’s impending measures on conflict minerals.
- Returning to the de facto Embargo in the region. Critics of 1502 often blame the law for creating a de facto minerals embargo in eastern Congo. Although there were several other factors to account for the drop in minerals trade in the region after the law’s passage, there is no doubt the legislation had a negative impact. But I would argue that impact stemmed much more from the absence of accompanying regulations for over two years – the real roadmap by which companies could know what it was they were supposed to do – than the structure of the law itself. Indeed, since the rule was issued in August 2012, more companies have evaluated and even developed in-region sourcing options, and the results of those options have improved. Sending the SEC back to the drawing board now will likely only hurt those people the law was intended to help by once again shaking investor confidence and company willingness to engage in-region.
With 1502, as with any new regulatory system, if one looks only in the short term, then of course the costs will far outstrip any gains. But looking at 1502 as a short-term piece of legislation is to miss both its point and potential benefits, for the people and miners upstream and thousands of companies downstream.
And if those benefits are set aside for another undetermined period, it is not clear who really wins. I guess we’ll have to let Bobby Fuller and the Dead Kennedys figure it out.