Big business prepares new legal assault on ‘conflict minerals’ rule

The Securities and Exchange Commission (SEC) is sparring with big business as it pushes new mandates on the use of “conflict minerals” from overseas.

The SEC is pressing ahead with a rule requiring companies to disclose whether they use minerals from conflict-stricken regions of Africa despite a court ruling that struck down a section of the regulation.

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Business groups are crying foul, arguing regulators should pull back the regulation in full, and are launching litigation to stop the SEC in its tracks.

The dispute is the latest twist in a long-running feud over an obscure portion of the Dodd-Frank financial reform law.

Lawmakers in that law directed the SEC to require companies that use gold, tantalum, tin or tungsten to track where the minerals originated. Companies would then have to disclose whether they came from regions of the Democratic Republic of Congo that have been torn apart by violence.

But the D.C. Circuit Court of Appeals ruled in April that requiring companies to publicly announce their findings amounted to government-compelled speech, and said the rule violated the First Amendment. In a split decision, the court ruled that forcing such labels onto products required companies to declare themselves “ethically tainted.”

But just because companies do not have to announce where their minerals came from does not mean the SEC won’t require them to go through the process of finding out.

On Thursday, the SEC issued guidance that said companies should still comply with the requirements that were not struck down by the court. Beginning June 2, companies would still have to file reports with the regulator detailing how they went about determining the origin of the minerals they use, even if announcing whether they are from conflict regions is now out of bounds.

Furthermore, companies that rely on the minerals in question will still have to disclose what facilities were used to process the minerals, what country they came from, and what efforts the company took to figure out their exact origin.

SEC Chairwoman Mary Jo White argued before Congress Wednesday that the court struck down one part of the rule, but specifically left the rest standing. Given that Congress ordered the SEC to establish the rules under Dodd-Frank, the rest should be put into place, she said.

“The fact they invalidated that one portion clearly did not invalidate, and went out of their way to say they did not invalidate the other portions,” she told the House Financial Services Committee. “The rest of it stands on its own.”

The SEC’s two Republican commissioners, Daniel Gallagher and Michael Piwowar, issued a statement the day before the guidance was released urging colleagues to halt the rules, and said the entire regulation should be struck down in court.

They argued the requirement has been “profoundly counterproductive” and resulted in an “effective embargo” on minerals from the region. A future court decision tossing out the rule could give Congress a chance to revisit the provision, but in the meantime, the SEC should conserve its resources and freeze the rule, they argued.

Business groups that first took the SEC to court over the rule are pouring resources into new litigation.

The U.S. Chamber of Commerce, National Association of Manufacturers, and Business Roundtable have announced they will ask the court to freeze the entire conflict mineral rule until “the implications of the decision are clear to all parties.”

They argue that with the disclosure component ruled unconstitutional, the rest of the rule also should come into question. And with a June 2 deadline for reports approaching, they are hoping for a court ruling sooner rather than later.

Those same business groups filed the initial legal challenge to the SEC’s rule shortly after they were finalized back in 2012. Business groups have long argued against the requirement, saying it would be incredibly difficult to implement and could end up harming innocent parties not tied to the targeted militias.

The standoff has not escaped the attention of lawmakers. A group of 12 key Democrats told the SEC after the ruling to move forward, now that the court had affirmed “key components” of the law. Senate Majority Whip Dick Durbin (D-Ill.) and Senate Banking Committee Chairman Tim Johnson (D-S.D.) were among those pushing for action.

“No delay is warranted in the implementation of those requirements while any remaining free speech issues are resolved,” they wrote.

But Rep. Scott Garrett (R-N.J.) accused the SEC of picking and choosing what projects to pursue, arguing that even as the commission has pushed conflict mineral rules it had slow-walked GOP-preferred projects like regulations implementing the JOBS Act.

"The SEC’s selective judgment in deciding when and how to follow clear congressional directives and when not to is disconcerting," Garrett said Thursday.

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