The First Amendment Lets Companies Keep Quiet About Blood Diamonds
Today a federal court ruled that corporations have a free-speech right, under the First Amendment to the United States Constitution, not to tell anyone if they're financing "war and humanitarian catastrophe" in Congo. So ... when you put it like that, it kinda sounds wrong, doesn't it?
I mean, I get that corporations are people; I'm OK with that, that's fine. And, yes, "not speaking" is a kind of speaking, so keeping silent is an exercise of free-speech rights. Still this is a weird case, because the issue is a Securities and Exchange Commission rule requiring securities issuers to disclose if they use "conflict minerals," and I always think of securities laws as a free-speech-free zone. There's a sense that securities laws sort of lurk quietly outside of the First Amendment. The SEC can tell you to say, or not say, whatever it wants, in exchange for letting you issue or buy or sell or trade or whatever securities in the U.S. market.
Or so I thought. 1 But the D.C. Circuit says that the low bar of "rational basis" review -- under which basically any regulation is fine -- "is the exception, not the rule, in First Amendment cases":
The Supreme Court has stated that rational basis review applies to certain disclosures of "purely factual and uncontroversial information." But as intervenor Amnesty International forthrightly recognizes, we have held that [this] is "limited to cases in which disclosure requirements are 'reasonably related to the State's interest in preventing deception of consumers.'" No party has suggested that the conflict minerals rule is related to preventing consumer deception. In the district court the Commission admitted that it was not.
Amnesty International also cited a previous D.C. Circuit case, SEC v. Wall Street Publishing Institute, Inc., which found no First Amendment problem with "the federal government's broad powers to regulate the securities industry." But the court today was unimpressed:
To read Wall Street Publishing broadly would allow Congress to easily regulate otherwise protected speech using the guise of securities laws. Why, for example, could Congress not require issuers to disclose the labor conditions of their factories abroad or the political ideologies of their board members, as part of their annual reports? Those examples, obviously repugnant to the First Amendment, should not face relaxed review just because Congress used the "securities" label.
Obviously repugnant to the First Amendment! There really is a movement "to require publicly traded corporations to disclose to shareholders all of their political donations." 2 The D.C. Circuit seems to be saying that that's not okay: Securities regulation can only be about "preventing consumer deception," not for accomplishing any broader goals. 3
If that's right ... well, the political-donation thing would seem to be off the table. A bigger problem might be executive-pay disclosure. While there's an obvious investor-protection angle there (you want to make sure that your executives aren't stealing all of the company's money, and that the board is paying attention to executive pay), there's an ideological angle as well. The SEC's proposed rule requiring companies to disclose the ratio between chief executive officer pay and median worker pay, for instance, does not seem aimed mainly at protecting shareholders. And the court today more or less said that that rule won't fly.
The D.C. Circuit is being deliberately coy here. Of course Congress wants to regulate things other than securities fraud "under the guise of securities laws." Securities laws are, sure, in part about protecting investors from fraud. But that's not all they are. They're also about the balance of power between shareholders and managements, for one thing.
More broadly, they're about what we expect from corporations that use our securities markets, the good citizenship requirements of a public company. And if one of our expectations of public companies is that they not secretly use conflict minerals, then securities laws are a good place to put that expectation.
Or so I thought, and a lot of people thought. Apparently not, though. Apparently securities laws are only for investor protection, and companies can only be forced to disclose things to protect investors from fraud. They can't legitimately be used to meet broader disclosure goals. It's right there in the Constitution.
Technically the SEC's conflict minerals rule does not apply to diamonds. We're keeping the headline anyway because "blood wolframite" doesn't have the same ring to it.
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Don't get me wrong, I'm not especially a fan of that rule. In particular it seems a bit harsh that money managers are restricted from accurately describing their performance, or that companies are not allowed to describe their companies using the metrics they use internally. Nor do I think that that's literally the rule -- that is, that there's an explicit agreement to give up free-speech rights in exchange for using the national securities markets. It just kind of seems to work out that way.
There is not an equivalent movement on factory conditions, but there's something even odder. Shareholder activists regularly submit proposals to companies like Wal-Mart demanding that they to disclose information about factory conditions, and the SEC requires those companies to include those proposals in their proxy statements. Is that consumer protection? Is it forced speech? Is it forbidden by the First Amendment? Is the SEC generally forbidden from forcing companies to include shareholder proposals in their proxies? Is Rule 14a-8 unconstitutional? I do not know. I do not know.
I'm exaggerating a little: Even if it's not subject to "rational basis review" but instead to some higher standard, a restriction on free speech can still be allowed. But this one wasn't, and it sounds like the court is generally bearish on similar disclosure requirements that aren't strictly keyed to investor protection.
(Matt Levine writes about Wall Street and the financial world for Bloomberg View.)
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