Two SEC Commissioners Call for Rejection of Conflict Minerals Rule (with Woody Comment)

In a Joint Statement issued on April 28, SEC Commissioners Gallagher and Piwowar assert that the United States District Court for the District of Columbia should invalidate the SEC's conflict minerals rule in its entirety. The Commissioners also argue that the SEC should grant a full stay of the conflict minerals rule pending the District Court's ruling.

The Commissioners offer two reasons for the ultimate rejection of the rule. First, they argue that the courts would eventually invalidate the entire rule, given their belief that First Amendment concerns "permeate all the required disclosures, not just the listing of products that have not been determined to be DRC conflict free." Modifying the rule to eliminate the required description of "not DRC conflict free" would fail to address the underlying First Amendment concerns because all disclosures related to conflict minerals, including those concerning the due diligence process, implicate the First Amendment concerns raised by the D.C. Circuit. Second, the Commissioners contend that, even if the due diligence disclosures do not raise First Amendment concerns on their face, the purpose of the rule, and that of Section 1502, is to "name and shame" conflict minerals users. Given this Congressional goal, the due diligence process should not be seen as "severable from the unconstitutional scarlet letter of 'not DRC conflict free.'" Therefore, the Commissioners argue, the District Court should find that the entire rule is invalid, and that the invalidity is rooted in the statute.

The Commissioners also argue that Section 1502 has been "profoundly counterproductive," resulting in a de facto embargo on Congolese minerals and thereby impoverishing legitimate miners in the region. In addition, the Commissioners contend, Congressional reconsideration of Section 1502 could save investors billions of dollars in compliance costs and relieve their and the agency's information overload by eliminating disclosures that are "immaterial to investment decisions."

Woody Comment: The Joint Statement was issued one week after twelve Democratic lawmakers sent a letter to SEC Chair Mary Jo White urging the SEC not to delay implementation of the rule. It is widely anticipated that the SEC will issue clarification on the disclosure requirement in the next few weeks. Absent a stay, issuers must file conflict minerals disclosures by June 2.It is no surprise that the Joint Statement was coauthored by Commissioner Gallagher – he dissented on the SEC's final rule in August 2012, strongly criticizing both the purpose of Section 1502 and the SEC's economic analysis of the rule. The other author, Commissioner Piwowar, was not on the Commission at the time when the final rule was adopted; however, he has been vocal in his belief that required corporate disclosures should be tailored to the benefit of investors (rather than to serve other political purposes) – a theme raised by Commissioner Gallagher in his August 2012 dissent.

See: SEC Joint Statement.See generally: "Conflict Minerals Legislation: The SEC's New Role as Diplomatic and Humanitarian Watchdog," by Karen Woody.Related news: D.C. Circuit Strikes down Part of SEC's Conflict Minerals Rule (with Woody Comment) (April 14, 2014); SEC Updates FAQs Regarding Conflict Minerals (April 7, 2014).