by Cydney Posner
There may be something of an internal battle among the commissioners on what to do about the conflict minerals decision of the D.C. Circuit. You’ll recall that the district court had upheld the rule in its entirety, and that the D.C. Circuit upheld most aspects of the rule. However, it concluded that the rule violated the First Amendment to the extent that companies were required to report that any of their products have “not been found to be DRC conflict free.” As a result, the judgment of the district court was affirmed in part and reversed in part, and the case was remanded to the district court for further proceedings consistent with the opinion.
In this joint public statement issued today, two (out of five) of the SEC’s commissioners, Daniel M. Gallagher and Michael S. Piwowar, made their views plain. (Well, plainer, since Commissioner Gallagher had already objected to the rule when it was initially adopted.) They maintain that, in light of the D.C. Circuit opinion, “the entirety of the rule should be stayed, and no further regulatory obligations should be imposed, pending the outcome of this litigation….A full stay is essential because the district court could (and, in our view, should) determine that the entire rule is invalid.” This joint public statement is a relatively novel approach by commissioners outside the context of rule adoption (and perhaps a few speeches). It suggests that perhaps there has been a dispute among the commissioners on what approach to take to the decision, which could explain in part why we’ve heard nothing official from the SEC on this matter. The statement also leads to the speculation that the views of these two commissioners were in the minority – i.e., the SEC does not intend to stay operation of the rule as they advocate — and that they wanted to make public their dissatisfaction with the outcome of the SEC’s decision. Just speculation, of course.
The two commissioners contend that the First Amendment concerns expressed in the D.C. Circuit opinion “permeate all the required disclosures, not just the listing of products that have not been determined to be DRC conflict free.” In essence, they believe that a limited modification of the rules – i.e., eliminating the requirement to characterize certain products as “not found to be DRC conflict free”—would not “fully address the First Amendment violation”; merely including a description of an issuer’s due diligence process may imply that the issuer could have “blood on its hands.” In addition, they believe that, at the heart of the rule (and of Section 1502 of Dodd-Frank) is a “name and shame” approach, under which “it is the listing of products—the apotheosis of the diligence process—that is central to the rule.” The descriptions of due diligence process alone, they argue, are insufficient to achieve any of the touted benefits and, therefore, “disclosures about the due diligence process should not be seen as severable from the unconstitutional scarlet letter of not DRC conflict free.” Further, they advocate that the entire rule, as well as Section 1502, should be found invalid, which would trigger a reconsideration by Congress as to whether the provision actually achieves the intended benefits, as well as save compliance costs and “ease the problem of information overload by eliminating special interest disclosures that are immaterial to investment decisions.“ Finally, given the uncertainty they perceive as to whether the District Court may invalidate the entire rule, they contend that a “full stay of the effective and compliance dates of the conflict minerals rule would not fix the damage this rule has already caused, but it would at least stanch some of the bleeding.”