Judge questions court's role in SEC's 'conflict minerals' rule

WASHINGTON Mon Jul 1, 2013 4:41pm EDT

WASHINGTON (Reuters) - A federal judge on Monday questioned whether U.S. courts should intervene regarding a rule that forces public companies to disclose if their products contain minerals extracted in the Democratic Republic of Congo, which has been castigated for committing human rights abuses.

Three business trade groups are challenging the "conflict minerals" rule from the U.S. Securities and Exchange Commission, saying it is nearly impossible to track minuscule amounts of such minerals in their supply chains. They also say the rule violates companies' free speech rights because it makes them engage in "politically charged" speech.

The rule is championed by human rights groups, which say disclosing this kind of information will help socially conscious investors. Opponents say the rule is a compliance nightmare that will cost billions and unfairly tarnish companies' reputations by forcing them to make political statements about their products.

During roughly three hours of oral arguments, Judge Robert Wilkins of the U.S. District Court for the District of Columbia suggested to an attorney for the trade groups that federal courts should consider deferring to Congress on the matter.

"This is a circumstance where a court should really defer to Congress and the executive in an area of foreign policy where the court has no expertise," he said.

Wilkins did, however, also question whether the SEC properly used its powers to minimize any negative impacts when drafting the rule.

The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable are challenging the rule, which was called for in an obscure provision of the 2010 Dodd-Frank Wall Street reform law and adopted by the SEC last year.

The case is being watched by the European Union, whose officials are also considering "conflict mineral" rules. The SEC case is not expected to end at the district court, because experts believe it will be appealed, whatever the decision.

The SEC rule in question requires publicly traded manufacturers to disclose whether any tantalum, tin, gold or tungsten used in their products may have originated from the conflict-ridden Democratic Republic of Congo.

Companies captured by the rule must undertake an inquiry to determine the country of origin for the minerals, which are often used in electronic devices such as cell phones.

If the minerals do come from that part of Africa, then the companies must undertake due diligence on the source and supply chain, publicly file a separate report and obtain an independent, third-party audit.

"What gives this such bite ... is the fact ... we have to characterize our products as tainted by the human rights violations," said Peter Keisler, an attorney for the business groups. "We are required to wear this scarlet letter."

The SEC counters that the rule merely requires companies to disclose factual information about their findings, similar to the same kinds of regulations that require restaurants to disclose calorie counts.

The groups challenging the rule also allege that the SEC did not properly weigh the costs and benefits of the regulation - a legal argument that has successfully been used in past cases to kill SEC rules.

The SEC has said its hands are tied because Congress did not intend to give a broad exemption from the rule for "de minimis" amounts of conflict minerals.

Wilkins challenged this view, at one point telling the SEC attorney that the agency "seems to have not really performed the legal analysis correctly" and that the agency has an "inherent authority in every case" to issue an exemption.

SEC lawyer Tracey Hardin contended that it would be inappropriate for the SEC to exempt de minimis amounts as long as Congress had determined there was a regulatory benefit associated with such disclosures.

The judge appeared amused when Hardin told him the SEC would still be open to exempting companies on a case-by-case basis.

Wilkins joked that such a policy would be a "win-win" for Keisler, the business groups' attorney, because he could get more legal business from individual companies seeking regulatory relief.

(Reporting by Sarah N. Lynch; additional reporting by Stella Dawson; Editing by Karey Van Hall and Dan Grebler)

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