AFKI Mining: The Court Has Ruled On Dodd-Frank, Now What?

AFKI Mining: The Court Has Ruled On Dodd-Frank, Now What?

On this website we have frequently written about America’s Dodd-Frank law on financial regulations, its implications for the Democratic Republic of the Congo and surrounding countries and its subsequent legal challenge (here, here and here).

In this AFK Insider exclusive mini-series we will examine the determinations of the DC Court of Appeals and why some advocates believe whether or not the regulations are upheld it will fail in its goals.

In the midst of this package of financial regulations, sections 1502-1504 were added, allowing the Securities and Exchange Commission to create rules in an attempt to require disclosure and auditing of all industry using “conflict minerals,” including Tin, Tungsten, Tantalum and Gold from the DRC and surrounding countries.

The SEC’s final rules required a three-step process for companies. First, companies must determine whether or not the rule applies to them. If this is the case, they must conduct a “reasonable country of origin inquiry” to determine whether the “necessary conflict minerals originated in covered countries.”

Finally, if a company discovers or has “reason to believe” that the conflict minerals came from the DRC or any of the other countries implicated by the Dodd-Frank law, the company must conduct determine, through due diligence, whether its materials do originate in the covered areas and submit a report including its due diligence and a private sector audit. This report must also include all products that have “not been found to be ‘DRC conflict free’.”

Attempts to avoid the Dodd-Frank law

While many large companies, including Intel, Apple and Hewlett-Packard have jumped on board, hoping the procedures could help stem violence in and around the war-torn country, a number of industry groups took to the courts in an attempt to avoid the regulation.

The National Association of Manufacturers, the Business Roundtable and the United States Chamber of Commerce took part in a lawsuit that alleged the SEC rule ran afoul of both the first amendment rights of the companies in their industries and the “statutory jurisdiction” of the Commission.

According to the lawsuit, argued in early January of this year, the disclosure requirements amounted to “compelled speech” by which companies were forced to report on their activities, both to the government and to consumers through publicly available information on products that had “not been found to be ‘DRC conflict free.’”

On Monday, the United States Court of Appeals for the District of Columbia set down its decision. The Court upheld the SEC’s right to make such rules, however, writing for the Court, Judge Arthur Raymond Randolph agreed with the industry groups on the first amendment claim that companies cannot be required to essentially “name and shame” themselves.

Judge Randolph wrote that the SEC rule-making process was a necessary part of the law, given the leeway assigned to it by the Dodd-Frank bill.

While the industry groups had argued that the various rules, including the Commission’s cost-side analysis, disclosure requirements, and the lack of a de minimis exception for use of conflict minerals were “arbitrary and capricious” and thus ran afoul of the law, Judge Randolph and the Court disagreed.

An apples-to-bricks comparison

The nature of sections 1502-1504, attempting to foster benefit “in the midst of an opaque conflict about which little reliable information exists, and concern[ing] a subject about which the Commission has no particular expertise” meant that “…even if one could estimate how many lives are saved or rapes prevented as a direct result of the final rule, doing so would be pointless because the costs of the rule – measured in dollars – would create an apples-to-bricks comparison.”

In essence, the Commission is granted wide leeway due to the difficulty in achieving what Congress asked it to do in sections 1502-1504 of Dodd-Frank.

This wide leeway does not, and indeed cannot, allow the Commission’s rules to violate the first amendment. According to relevant first amendment jurisprudence, in order for the regulation to survive it must be narrowly tailored to directly and materially advance a substantial government interest.

While the regulation need not be the “least restrictive” option for speech, there must be a “reasonable” fit between the goal and the means for achieving that goal. According to settled precedent, if the government presents no evidence that a less-restrictive means would be unsuccessful for achieving the goals, it cannot succeed.

In this case the SEC presented no evidence that a less-restrictive means would be unsuccessful. I.E. the SEC did not attempt to show how a disclosure requirement that would allow companies to disclose less information and thus be less of a burden on their first amendment right against compelled speech would fail to achieve the goals of sections 1502-1504 and thus cannot stand.

For advocates of the disclosure requirements, this is a greater victory than defeat. The Court upholding the ability of the SEC to make such rules while striking down the rule because it was not narrowly tailored enough allows the Commission another bite at the apple. Should the SEC attempt to re-write the rules in a more narrow fashion, based on this opinion it is possible they would be upheld.

However, many scholars and advocates believe the disclosure requirements, in whatever form they can take, will fail to achieve peace or prosperity in the DRC and surrounding countries. For reasons why many believe the regime is destined to fail, tune in to Part two.


Andrew Friedman is a human rights attorney and consultant who works and writes on legal reform and constitutional law with an emphasis on Africa. He can be reached via email at afriedm2@gmail.com or via twitter @AndrewBFriedman.