Thursday, January 9, 2014

Aaron Rodgers, Intel and the “Scarlet Letter” of Dodd-Frank- Part 2

On Tuesday, I attended the oral argument for the National Association of Manufacturers v. SEC—the Dodd-Frank conflict minerals case. Trying to predict what a court will do based on body language and the tone of questioning at oral argument, especially in writing, is foolish and crazy, but I will do so anyway.

I am cautiously optimistic that the appellate court will send the conflict mineral rule back to the SEC to retool based on the three arguments generated the most discussion. First, the judges appeared divided on whether the SEC  had abused its discretion by changing the statutory language requiring issuers to report if minerals “did” originate from the DRC or surrounding companies rather than the current SEC language of “may have” originated. This language would sweep in products in which there is a mere possibility rather than a probability of originating in covered countries. One judge grilled the SEC like I grill my law students about the actual statutory language and legislative intent, while another appeared satisfied with SEC’s explanation that issuers did not have to file if the lack of certainty was due to a small number of responses from suppliers or for lack of information. My prediction- if the SEC loses, they will have to rewrite this section to comport with Congressional intent.

The second main issue concerned the SEC’s failure to apply a de minimis exception to the rule. NAM’s lawyer provided a real-life example of a catalyst used in producing automobiles that sometimes washed away during production but at other times could leave just one part per million of tin in the finished product. Judge Srinivasan pointed out that if the mineral could wash away but the product could still function, then perhaps it wasn’t “necessary” as the law required for reporting. Judge Sentelle raised a concern about “breaking new ground” by requiring the SEC to enact a de minimis exception. The SEC bolstered its argument by indicating that no commentator that had proposed such an exception during the rulemaking process  had provided a workable threshold. My prediction- this is a toss up. This was the SEC’s most successful argument of the day.

Many commenters believed that the third argument—the First Amendment claim-- was spurious and/or a Hail Mary plea when NAM first raised it last year. Yet this argument provided the most interesting discussion of the day, especially since Judge Randolph specifically reminded NAM’s counsel to discuss it and not save it for rebuttal as NAM had planned. NAM argued that by requiring companies to declare on their websites that their products were not “DRC-Conflict Free,” thereby denouncing their own products, this amounted to a “scarlet letter.” NAM conceded that the government could ask for the information and could post it, but maintained that requiring companies to “shame” themselves was unconstitutional. This argument gained traction with both judges Randolph and Sentelle, who called it “compelled speech.” The judges also questioned the SEC on: whether the SEC had ever or should focus its efforts on communications to consumers; how the SEC would enforce the rule, asking whether a group of scientists would do product inspections; how this rule would achieve Congress’ intent of securing the safety of the Congolese people; whether the government could require companies to indicate whether they had used child labor overseas; and whether the intent of the shaming provision was to cause a boycott- bingo! My prediction- the SEC loses on this provision.

If the SEC does have to go back to the drawing board, it will be interesting to see how current Chair Mary Jo White influences the rule given her public statements about the rule being out of the SEC’s purview. I hope that the European Commission, which has done an impact analysis, will pay close attention as they roll out their own conflict minerals legislation to the EU.

Many have asked what I think the government should have done to help the people of Congo. Put simply, the government could and should fund and enforce the DRC Relief, Security, and Democracy Promotion Act of 2006, which has over a dozen provisions addressing security sector reform, minerals, infrastructure and other matters that could provide a more holistic solution. Next week, I will blog about other ways that the government could incentivize business to address human rights issues around the world.

http://lawprofessors.typepad.com/business_law/2014/01/aaron-rodgers-intel-and-the-scarlet-letter-of-dodd-frank-part-2.html

Constitutional Law, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink

Comments

I cringe when I see this type of poorly crafted legislation. By analogy, the 2008 Amendment to the Lacey Act has resulted in poor administrative judgments which can result in irreparable damage. See, e.g., http://articles.latimes.com/2013/jun/01/entertainment/la-et-ms-lacey-act-musical-instruments-usda-report-amendment-20130531; http://thecable.foreignpolicy.com/posts/2014/01/02/us_customs_not_sorry_for_destroying_11_rare_flutes_of_renowned_musician#sthash.nMhjn1ZK.dpbs.

Posted by: Tom N | Jan 10, 2014 7:05:59 AM

Post a comment