April 14 (Bloomberg) -- A U.S. Securities and Exchange Commission rule requiring companies like Boeing Inc. and Apple Inc. to disclose whether any “conflict minerals” are used in their products violates their free-speech rights, an appeals court in Washington said.
The rule was part of the 2010 Dodd-Frank Act overhauling regulations of securities markets and applies to certain minerals, including gold, tin, tungsten and tantalum, mined in Democratic Republic of the Congo and neighboring countries. It was intended to help ensure that use of the minerals didn’t benefit armed groups responsible for violence in the region.
The appeals panel decision represents the second time courts have faulted regulators for carrying out a requirement of the 2010 Dodd-Frank Act. SEC Chair Mary Jo White said in October the goals of the Dodd-Frank disclosure mandates were laudable while questioning Congress’s decision to have her agency implement them.
The SEC’s authority to require disclosure of important information to investors shouldn’t be used to “effectuate social policy or political change,” White said.
The requirement to disclose the information will cost thousands of companies as much as $4 billion to put in effect, according to the SEC.
It obligates a company to disclose those products that have “not been found to be ’DRC conflict-free’” in reports to the SEC that must also be posted on the firm’s website.
That statement goes beyond disclosure that is merely factual and non-ideological, U.S. Circuit Judge A. Raymond Randolph, wrote for the majority of a three-judge panel at the U.S. Court of Appeals.
“It requires an issuer to tell consumers that its products are ethically tainted,” and leaves a company unable to use its free-speech right to dispute that assessment by remaining silent, Randolph wrote. “By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”
U.S. Circuit Judge Sri Srinivasan declined to join the First Amendment part of the ruling and suggested in a separate opinion that it might be undermined by the full Washington appeals court in a pending case.
The court rebuffed other challenges to the disclosure rule, rejecting arguments by the National Association of Manufacturers and other business groups that the SEC didn’t properly measure compliance costs and set overly rigorous due diligence standards for identifying the presence of the minerals.
The appeals panel sent the case back to a lower court to address the speech issues in the rule.
“I think the decision is actually quite good for the SEC” because most of the rule was affirmed, said Julie Murray, an attorney who represented Amnesty International USA Inc., which intervened in the case on behalf of the commission.
Judith Burns, a spokeswoman for the SEC, said the agency is studying the ruling.
The National Association of Manufacturers is pleased that the court found the regulation unconstitutional, James Hennigan, a spokesman for the group, said in an e-mailed statement.
“We understand the seriousness of the humanitarian situation in the Democratic Republic of Congo (DRC) and abhor the violence in that country, but this rule was not the appropriate way to address this problem,” Hennigan said.
In the case highlighted by Srinivasan, he and 10 other judges on the Washington appeals court are slated to hear arguments May 19 concerning a Department of Agriculture requirement that meat labels specify where an animal was born, raised and slaughtered.
Srinivasan urged his colleagues on the panel in the mineral case to hold off ruling on its free-speech component “rather than issue an opinion that might effectively be undercut by the en banc court in relatively short order.”
The hearing in the meat-labeling case will focus on the standard the government needs to meet to force companies to make commercial disclosures against their will.
The conflict mineral rule, adopted in August 2012, applies to an estimated 6,000 companies that file SEC reports.
In July, U.S. District Judge John Bates threw out a rule that forced about 1,100 public oil and mining companies to disclose payments they make to foreign governments. The SEC didn’t appeal the ruling and said it would rewrite the rule to comply with the judge’s decision.
That regulation was intended to increase transparency and thwart corruption by giving citizens of resource-rich countries information about their governments’ oil and mineral revenue.
The conflict minerals case is National Association of Manufacturers v. U.S. Securities and Exchange Commission, 13-5252, U.S. Court of Appeals, District of Columbia (Washington).
With assistance from Dave Michaels in Washington.
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