A federal appeals court on Monday struck down a key disclosure requirement of the SEC’s conflict minerals rule, saying it violates the First Amendment’s prohibition of compelled speech.

It’s a victory for companies — at least, a temporary one, as this is unlikely to be the last legal twist in the case brought by the National Association of Manufacturers — but what does it say about the merits of the overall rule?

The rule requires securities issuers to conduct due-diligence investigations of their supply chain and operations to determine whether any of their products contain gold, tantalum, tin or tungsten mined in the Democratic Republic of the Congo (DRC) or neighboring countries. Further, the rule, which the SEC issued as required under the Dodd-Frank Act, requires companies to report all such products and designate them, in their SEC filings and on their websites, as “not DRC conflict-free.”

The ruling by the U.S. Court of Appeals for the District of Columbia doesn’t spring companies from having to conduct the complicated and costly due diligence. Rather, it relieves those with products containing the conflict minerals from having to publicly label those products in a way that implies the companies are complicit in the DRC violence that precipitated the Dodd-Frank provision.

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“Products and minerals do not fight conflicts,” the court wrote. “The label ‘conflict free’ is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted…. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility…. By compelling an issuer to confess blood on its hands, the statute interferes with the exercise of free speech under the First Amendment.”

Opinion_Bug7That seems to make sense, as far as it goes, and CFO is a staunch defender of the First Amendment. But, one may ask, what is the purpose of requiring companies to conduct the due diligence if they do not also have to report what products contain the conflict minerals? Without that reporting requirement, a company must only report that it has such products and describe the due-diligence measures taken to establish their “source and chain of custody.” Isn’t something missing?

Isn’t the point of the law ultimately to get companies to stop using these minerals mined in the war-torn area, so as to drive down their value to a point where armed factions will have less motivation to kill and rape in their zeal to own access to mines?

Will companies have as much reason to back off from using these substances if they don’t have to identify specific products that contain them?

Four questions were posed in the previous three paragraphs. For those keeping score, the answers, chronologically, are “who knows,” “it would seem so,” “yes” and “no.” At present, it appears that the U.S. government’s efforts to move the needle in the Congo are devolving into a mess.

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One response to “Court Decision Makes a Mess of Conflict-Minerals Rule”

  1. While the answer to your 3rd question may correctly be “yes” (that’s the “point of the law”), where’s the evidence that if all SEC reporting companies stopped using these minerals sourced from the DRC, would their values in fact be lessened and if so, would the motivation of the armed factions to rape and kill be lessened? Asked that way, the answer must be “who knows”. So the next question (not asked) should be “If the point of the law is admirable, but of questionable/doubtful effectiveness, is the cost of the mandated due-diligence measures worthwhile?”. At best the answer is again, at best, “who knows”. The only certainty of the law is that it is extremely expensive, and non-productive to the operation of each company’s business. In the final analysis, in my opinion, the law’s purpose is morally good but its effectiveness is far from certain and extremely costly, so it ought to be overturned by the Supremes.

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