SEC Conflict Mineral Rule Violates Free Speech

(CN) - Securities regulators cannot compel issuers to "confess blood on [their] hands," and declare whether their products are "DRC conflict free" on their websites, the D.C. Circuit ruled.

"For the last fifteen years, the Democratic Republic of the Congo (DRC) has endured war and humanitarian catastrophe," the 29-page opinion begins. "Millions have perished, mostly civilians who died of starvation and disease. Communities have been displaced, rape is a weapon, and human rights violations are widespread.

"Armed groups fighting the war finance their operations by exploiting the regional trade in several kinds of minerals. Those minerals - gold, tantalum, tin, and tungsten - are extracted from technologically primitive mining sites in the remote eastern Congo. They are sold at regional trading houses, smelted nearby or abroad, and ultimately used to manufacture many different products. Armed groups profit by extorting, and in some cases directly managing, the minimally regulated mining operations."

Under a provision of the Dodd-Frank Wall Street Reform Act, the Securities and Exchange Commission required firms to disclose whether they use "conflict minerals" from the Congo. The first reports are due in May 2014.

The D.C. Circuit upheld the reporting regulations Tuesday, finding that the SEC properly accepted Congress' presumption that the rules would reduce violence in the Congo by limiting funding to armed groups.

It was reasonable that the agency could not quantify the rules' benefits, the court found.

"Here, the rule's benefits would occur half-a-world away in the midst of an opaque conflict about which little reliable information exists, and concern a subject about which the commission has no particular expertise," Judge A. Raymond Randolph wrote for the three-judge panel. "Even if one could estimate how many lives are saved or rapes prevented as a direct result of the final rule, doing so would be pointless because the costs of the rule - measured in dollars - would create an apples-to-bricks comparison."

In addition, the SEC "it did not go as far as it might have, and it declined to require due diligence by issuers who encounter no red flags in their inquiry," Randolph added. "By doing so, the commission reduced the costs of the final rule, and resolved the association's concern that the rule will yield a flood of trivial information."

The court struck down the agency's requirement that companies must post whether their products are "DRC conflict free" on their websites, because this rule unconstitutionally compels speech.

Regulators argued that the conflict-free label discloses purely factual information, but Randolph disagreed.

"At all events, it is far from clear that the description at issue - whether a product is 'conflict free' - is factual and nonideological. Products and minerals do not fight conflicts," Randolph wrote. "The label 'conflict free' is a metaphor that conveys moral responsibility for the Congo war. ... By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment."

Judge Sri Srinivasan did not join in the court's First Amendment holding, given that the same question is currently pending before the en banc court in another case .

"I would opt to hold in abeyance our consideration of the First Amendment issue in this case pending the en banc court's decision in the other, rather than issue an opinion that might effectively be undercut by the en banc court in relatively short order," Srinivasan said.

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