by Cydney Posner
To no one’s surprise, on Friday, the SEC and Amnesty International filed petitions for en banc rehearing in the conflict minerals case, National Association of Manufacturers, Inc. v. SEC. That case, decided two-to-one in August of this year by a three-judge panel of the D.C. Circuit, reaffirmed that Court’s initial judgment that the requirement in the conflict minerals rule to disclose whether companies’ products were “not found to be DRC conflict free” amounted to “compelled speech” in violation of companies’ First Amendment rights. The filing of the petitions does not, by itself, have any impact on the current state of play regarding conflict minerals compliance.
In the absence of further guidance from the SEC or the Division of Corporation Finance, the April 2014 Statement of Corp Fin Director Keith Higgins continues to apply. More specifically, companies are still expected to file their Forms SD and Conflict Minerals Reports on a timely basis. However, as the statement provides:
“No company is required to describe its products as ‘DRC conflict free,’ having ‘not been found to be DRC conflict free,’ or ‘DRC conflict undeterminable.’ If a company voluntarily elects to describe any of its products as ‘DRC conflict free’ in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule. Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as ‘DRC conflict free’ in its Conflict Minerals Report.”
See this News Brief. While the SEC could conceivably issue a revised statement modifying this advice, among other things, to require IPSAs under additional circumstances, it seems unlikely, given the current timing and complexity of compliance, that the SEC would take this step for the 2015 reporting period. For further background on the conflict minerals case, see these PubCo posts: 8/18/15, 9/14/14, 7/29/14, 7/16/14, 4/14/14.)
In its petition, the SEC argues that “en banc review is warranted because the [August 2015] opinion conflicts with this Court’s en banc decision in American Meat Institute v. U.S. Department of Agriculture, [see this PubCo post] as well as Supreme Court precedent, and it addresses issues of exceptional importance.” With regard to commercial speech, the SEC maintains, speakers have only a minimal interest in opposing the disclosure as long as it is “purely factual and uncontroversial Information.” Further, the SEC argues, the Majority was wrong in concluding that the disclosure requirement still would not survive review under even the more lenient standard because the Court erred in requiring that the SEC demonstrate that its rule would actually alleviate the harms it identified. Rather, the Court should have deferred to the determinations in that regard made by Congress in connection with adoption of Dodd-Frank. In addition, the SEC contended that the Majority’s holding that the more lenient standard developed in Zauderer v. Office of Disciplinary Counsel was confined to compelled disclosures in advertisements and product labels was unprecedented. That holding, the SEC argued, “calls into question the application of Zauderer to many disclosures required under the securities laws, including those aimed at preventing investor deception,” a result that is “in tension with the Supreme Court’s statements that the ‘exchange of information about securities’ is ‘regulated without offending the First Amendment’ and that its commercial speech cases do not ‘cast doubt on the permissibility of these kinds of commercial regulation.’ Ohralik v. Ohio State Bar Ass’n,….” In addition, the SEC maintains that the Majority was incorrect in concluding that the conflict minerals rules’ compelled disclosure is controversial – and thus ineligible for lenient review –because there was public debate about the topic of the disclosure.
The petition of intervenor Amnesty International likewise argued that the majority’s conclusion that Zauderer applies “only in the context of advertising and product labeling is at odds with Zauderer’s core rationale, as reaffirmed” in AMI. Rather, Zauderer often referred to “advertising” because it dealt with the constitutionality of an advertisement; that is, “advertisement” was descriptive of the facts, not a limitation. In addition, Amnesty reached back to the Court’s first opinion to contend that the Majority erred by holding that the relaxed review set out in SEC v. Wall Street Publishing “does not apply to securities disclosure requirements unless they aim to prevent misleading speech about securities sales.” That holding “conflicts with that case and Full Value Advisors, LLC v. SEC,…. These two aspects of the majority’s decisions threaten the viability of the modern securities regime by precluding application of the relaxed First Amendment review long applied by this Court to a range of established disclosures.” For example, the SEC requires disclosures in a variety of contexts, such as periodic reports and proxy materials, that would not be obviously characterized as advertising or labeling. Amnesty also contended that the Court erred in denying the application of the more lenient Zauderer standard because it viewed the disclosure as ideological; as in Meese v. Keene, “when the term ‘DRC conflict free’ ‘is construed consistently with the neutral definition contained in the text of the statute itself, the constitutional concerns voiced by [appellants] completely disappear.’” Finally, Amnesty contends, although the majority stated that “it recognized that Congress is entitled to deference in its predictive judgment regarding whether a disclosure requirement will advance the government’s interests,… it second-guessed Congress at every step,” including the Government’s interest in informing investors. In particular, Amnesty argues, the Majority erred in ignoring “Congress’s interest in using transparency to reduce funding for armed groups and instead focus[ing] on whether pursuing that interest would actually reduce conflict in the DRC region.” The Majority faulted the SEC for not quantifying the benefits of the disclosures, a conclusion that “directly undermines AMI, which concluded that, under Zauderer, when the government has a legitimate interest in disclosure, any requirement of a fit between ends and means is ‘self-evidently satisfied’ by ‘a reasonably crafted mandate to disclose purely factual and uncontroversial information about attributes of [a] product or service being offered.”