Last week, a federal appeals court ruled that one section of the Securities and Exchange Commission’s conflict mineral rule, its response to Sect. 1502 of the Dodd-Frank financial reform law, was unconstitutional. At issue was the mandate that public companies declare, in their SEC filings and on their websites, whether their minerals were conflict-free. The term conflict-free, the court felt, connotes a value judgment, and requiring companies to use a term they may not agree with (a “metaphor,” it was called) is compelled speech and in violation of the First Amendment.
Initial news reports, including JCK’s, portrayed the ruling as a major defeat for Sect. 1502. Certainly, the dueling sides seemed to view it that way. The National Association of Manufacturers, which challenged the law in court, said it was “pleased.” NGO Enough Project called it a “major step backward.”
That was quickly followed by a different consensus, which argued that the ruling was actually a validation of the conflict mineral provision, even a victory for its proponents. (See our follow-up.) For one, the court rejected a series of challenges to the law, striking down only one provision. Which means that the affected companies will almost certainly have to file reports with the SEC anyway, barring another legal twist and turn (which is a remote possibility).
Part of the reason for this confusion is that, with this one section now tossed out, it’s not clear how it fits in the overall puzzle. Companies will still likely be required to file; it’s just not clear what they will be required to say. This isn’t just a question of semantics. The people who crafted this rule wanted to embarrass companies that didn’t have what they considered the proper systems in place. Letting a company choose its own wording doesn’t have the shaming power as the wording the activists favored: “Not DRC conflict-free.”
With the deadline looming—initial reports are due May 31—it will be up to the lower court to which this issue has been remanded, as well as the SEC, to clear this up. And yet the SEC has remained eerily silent—not issuing any kind of guidance—raising the possibility the filing date will be delayed. In which case the ruling really will be a defeat for the activists, who have repeatedly complained about delays in implementing the law. But it also leaves the affected companies in limbo, and plenty are confused enough as it is. According to a Price Waterhouse survey, the majority of affected companies may be unprepared to meet the deadline.
I have broad sympathy for NGO goals and NGOs in general, but from everything I’ve read, Sect. 1502 was a poor piece of legislation that had a disastrous effect. It caused companies to panic and hastily pull out of all areas of Congo, throwing thousands out of work in that country, where it’s known as “Obama’s law” (and not in a good way).
Perhaps this episode will serve as a lesson to legislators to think before they act, but it should also serve as a warning to industry. Trade people often wonder why the government and NGOs keep picking on our business. It’s because so many of our supply chains are uncontrolled, opaque, and open to abuse, making them a magnet for warlords, terrorists, organized crime, money launderers, and the like. In the last few years, diamonds in particular have landed on the radar of law enforcement. It makes sense they would draw attention from other parts of government as well.
If the trade doesn’t develop ways to get a better handle on its supply chains, legislators will try to do it for us. They may not always have in mind the best interests of the industry, and they may not care. And once a law is enacted, as we have seen, it is tough to get rid of. Opponents tried to kill this provision in the SEC, and they tried to kill it in the courts. So far, they have failed repeatedly. This saga gives us a clear warning: Act now, or there will be a lot more 1502s coming down the pike.