Securities Regulation -- 2017



National Association of Manufacturers v. SEC   (U.S. District Court for the District of Columbia)

Challenging law and SEC rule on Conflict Minerals

The NAM's suit challenging the conflict minerals rule issued by the Securities and Exchange Commission (SEC) in August 2012 was transferred from the D.C. Circuit to the district court on May 2, 2013. While the trial judge upheld all aspects of the rule, the D.C. Circuit reversed on First Amendment grounds. The case was remanded to the district court, and on April 3, 2017, it entered final judgment declaring Sec. 1502 of the Dodd-Frank Act and the SEC regulations on conflict minerals unconstitutional "to the extent that the Statute and the Rule require regulated entities to report to the Commission and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’” Click here for a summary of the appeal to the D.C. Circuit.

 


Environmental -- 2015



National Association of Manufacturers v. SEC   (D.C. Circuit)

Appeal of NAM's challenge to SEC rule on Conflict Minerals

This is the appeal of an adverse ruling from the district court judge in our suit challenging the SEC's conflict minerals rule. Click here for details on that ruling.

Our appeal was expedited, and focused on largely the same issues that were before the trial judge. Review was de novo, which means that the appeals court looks at the case fresh, without any presumption that the trial court's ruling is binding on them.

The NAM, joined by the Business Roundtable and the U.S. Chamber of Commerce, argued that the SEC incorrectly interpreted the statute, which requires reporting of certain minerals that "did originate" in and around the Democratic Republic of the Congo (DRC), to cover minerals that "may have originated" there. It also failed to recognize and use its power to establish a reasonable de minimis exception for small amounts of minerals, which could provide substantial relief from the burdensome requirements of the rule for thousands of manufacturers. We also raised an important First Amendment objection to the requirement that companies make misleading and stigmatizing public statements unfairly linking their products to terrible human rights abuses.

We filed our main brief on the merits on Sept. 11, and our reply Nov. 13, 2013. Oral argument was held on Jan. 7, 2014, during which counsel for the SEC faced difficult questioning about the SEC's rule and the First Amendment objections.

On April 14, the court deferred to the SEC on its interpretations of the substantive provisions included in the rule, but overturned the requirement that companies disclose that their products are not "DRC conflict free." The First Amendment prohibits the requirement that companies report to the SEC and post on company web sites the fact that certain manufactured products are not “conflict free”. This constitutes government-compelled speech. It is now up to the SEC to determine what reporting requirement to impose and what to do while it is making that decision, since the first reports under the regulation must be filed by June 2, 2014. If it tries to formulate alternative reporting requirements, it may need to revist the whole public reporting aspect of the rule through a new round of notice-and-comment rulemaking.

On April 29, the NAM, Chamber and Roundtable filed a motion with the SEC to stay the rule or at least filing deadline. The whole point of the rule and the statute was to try to effect social change by shaming companies who cannot label their products as "DRC conflict free," and since the shaming mechanism has been struck down, the remainder of the rule has questionable benefits. Moreover, there are a host of questions without easy answers that must be considered before imposing enormous costs on industry. The SEC will have to determine what type of disclosure should replace the unconstitutional requirement, whether that would require changes to other provisions of the rule, re-analyze the costs and benefits of the rule, and provide for notice-and-comment rulemaking. Finally, requiring some type of truncated report is an approach that will not serve the law's intended purpose and will worsen the massive uncertainty and confusion among those who are subject to the rule.

The same day, Keith Higgins, director of the SEC's Division of Corporation Finance, issued a statement saying that companies will still need to file their first reports by the due date and address those portion of the rule that the court upheld. He added that "No company is required to describe its products as 'DRC conflict free,' having 'not been found to be ‘DRC conflict free,’' or 'DRC conflict undeterminable.' If a company voluntarily elects to describe any of its products as 'DRC conflict free' in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule. Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as 'DRC conflict free' in its Conflict Minerals Report.

We also released a statement April 30 saying in part that "Congress and the SEC need time to evaluate how to amend the statute and/or the rule in light of the court's decision. Given the significant issues involved, we believe that it is in everyone's interest to stay the rule until these issues can be fully analyzed and addressed. Accordingly, we will ask the DC Circuit to grant a full stay of the rule until the implications of the decision are clear to all parties."

On May 2, 2014, the SEC issued a partial stay of the portion of the rule that requires issuers to disclose that any of their products have "not been found to be “DRC conflict free.'" It denied our request that the entire rule be stayed. The Commission did not, however, stay the effective date (June 2) for complying with all the other requirements of the rule. Companies are struggling to determine the meaning of the SEC’s action and what to do. The D.C. Circuit’s decision in our challenge to the rule means that the case will be sent back to the trial judge to determine whether to vacate the rule in its entirety or provide some other remedy.

Because this litigation was ongoing and the SEC had not voluntarily stayed the implementation of the rule, the NAM and other business organizations went back to the D.C. Circuit on May 5 and filed an emergency motion for stay of the rule in its entirety until the trial court has addressed the unresolved questions.

We argued that the rule’s compelled confessions, which have been declared unconstitutional, constitute the entire basis for the rule, imposing astronomical costs on affected companies. It makes no sense to enforce a rule that no longer achieves its goals and that likely will be vacated, and a stay would avoid “forcing companies to implement interim procedures for filing truncated reports under unilateral staff guidance that is subject to change at any time.”

On May 14, the court denied our motion for a stay. Companies must now comply with the modified filing requirements by June 2.

On May 29, both the SEC and Amnesty International asked the D.C. Circuit to hold any further appeals until after it ruled in the American Meat Institute v. USDA case, which it did on July 29. On Aug. 15, Amnesty International supplemented its brief in support of a petition for rehearing en banc, and on Aug. 28, the Court ordered us to file a response. We filed it on Sept. 12, arguing that the standards for rehearing this case have not been met, and that the court's decision in the American Meat Institute case was limited to "purely factual and uncontroversial" disclosures, not disclosures like the ones required by the conflict minerals regulation. The disclosures in this case, according to the judges who ruled on them, require an issuer "to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups," or even if the issuer is merely unable to determine their origin.

On Nov. 18, the 3-judge panel agreed to rehear this case, and asked for further briefing on the impact of the decision in American Meat Institute v. USDA, as well as the meaning of "purely factual and uncontroversial information" and whether that determination is a question of fact for the court. The SEC filed its brief on December 8, and ours was filed December 29. Oral arguments were not held.

The 3-judge panel finally ruled on Aug. 18, 2015, that the compelled disclosures are unconstitutional. It ruled that the looser standard of review under the Zauderer case does not apply here, because that case involved only voluntary commercial advertising, not government-compelled statements about products. But even if this looser standard of review applied, the government must have a sufficient interest in mandating disclosures, and the rule must be effective in achieving its objectives. Instead, whether the law will decrease the revenue of armed groups in the DRC and diminish the humanitarian crisis there "is entirely unproven and rests on pure speculation." No hearings were held on the impact of the law prior to enactment, and later hearings were inconclusive. This is an insufficient justification to compel speech under the First Amendment.

The majority also analyzed the part of the ruling in the American Meat Institute case and found that determining whether compelled speech is about "purely factual and uncontroversial information" is a puzzling exercise, but that the SEC's requirement to label products as "conflict free" or not is hardly factual and non-ideological. Instead, it ethically taints products and stigmatizes companies in violation of the First Amendment. The SEC and Amnesty International petitioned for rehearing before the full D.C. Circuit court, but that request was denied, and the case was not appealed to the Supreme Court.


Related Documents:
DC Circuit's opinion  (August 18, 2015)
NAM's supplemental brief  (December 29, 2014)
NAM Response to petition for rehearing en banc  (September 12, 2014)
NAM Emergency Motion for D.C. Cir. stay  (May 5, 2014)
NAM Motion to SEC for stay  (April 29, 2014)
NAM Reply Brief  (November 13, 2013)
NAM Opening Brief  (September 11, 2013)

 


Securities Regulation -- 2013



National Association of Manufacturers v. SEC   (D.C. Circuit)

Challenging law and SEC rule on Conflict Minerals

The NAM filed its main brief on January 2013, in its court challenge to the conflict minerals rule issued by the Securities and Exchange Commission (SEC) in August 2012. The final rule imposes an unworkable, overly broad and burdensome system that will undermine jobs and growth and may not achieve Congress’s overall objectives. Our brief asked a federal appeals court to modify or set aside the rule, arguing that the SEC adopted one of the costliest rules in its history while rejecting alternative regulatory options that would have substantially reduced the costs. The SEC also misread the statute and imposed new burdens not required by Congress on far more companies than expected. The business community understands the seriousness of the conflict occurring in the Democratic Republic of Congo and the need to implement solutions to bring an end to the violence. However, while well intentioned, the SEC’s final rule goes too far, and business groups have suggested constructive ways to make the rule more workable.

Oral arguments, originally scheduled for May before Judges Henderson, Tatel and Griffith, were canceled. A D.C. Circuit decision on April 26, 2013 in American Petroleum Institute v. SEC held that the D.C. Circuit lacked jurisdiction over a petition for review quite similar to the one filed in this case, and that the case should first be heard by a federal district court. In light of this development, we moved to transfer the case to the U.S. District Court for the District of Columbia, and the D.C. Circuit agreed.. For details on proceedings in the district court, click here.


Related Documents:
NAM Motion to Transfer  (April 30, 2013)
NAM Reply brief  (March 22, 2013)
NAM Opening brief  (January 16, 2013)
NAM Motion to Expedite  (November 21, 2012)
NAM Statement of Issues  (November 21, 2012)
NAM Amended Petition for Review  (October 22, 2012)

 

National Association of Manufacturers v. SEC   (U.S. District Court for the District of Columbia)

Challenging law and SEC rule on Conflict Minerals

The NAM's suit challenging the conflict minerals rule issued by the Securities and Exchange Commission (SEC) in August 2012 was transferred from the D.C. Circuit to the district court on May 2, 2013. Judge Wilkins agreed to our request for expedited consideration of the case, to treat the petition for review as a complaint, and to decide the case on the briefing already submitted to the Court of Appeals.

Our main brief on the merits asked the court to modify or set aside the rule, arguing that the SEC adopted one of the costliest rules in its history while rejecting alternative regulatory options that would have substantially reduced the costs. The SEC also misread the statute and imposed new burdens not required by Congress on far more companies than expected. The business community understands the seriousness of the conflict occurring in the Democratic Republic of Congo and the need to implement solutions to bring an end to the violence. However, while well intentioned, the SEC’s final rule goes too far, and business groups have suggested constructive ways to make the rule more workable. The final rule imposes an unworkable, overly broad and burdensome system that will undermine jobs and growth and may not achieve Congress’s overall objectives.

On July 23, the judge upheld all aspects of the rule, deferring to the SEC for considering the rule's burden on efficiency and competition and the costs of compliance. It deferred to the agency's conclusion rejecting a de minimis exception, imposing a "reasonable country of origin inquiry" for minerals that "may" have originated in the region of the Congo, and setting different phase-in periods for large and small companies. It found the word "manufacture" to be ambiguous and accepted the application of the rule to those who contract to manufacture.

Finally, applying an intermediate level of scrutiny to our First Amendment challenge to the requirement that conflict mineral disclosures be on public web sites, the judge cited the government's foreign relations interest as justification for again deferring to the SEC. The ruling found a "reasonable fit" between the rule and Congress's objectives in promoting peace and security in and around the Congo.

We appealed this decision. Click here for this subsequent history.

Click here for the briefs and other details on the case originally filed in the D.C. Circuit.


Related Documents:
NAM Notice of Suplemental Authority  (July 3, 2013)
NAM Response to SEC Notice of Supplemental Authority  (June 28, 2013)

 


OSHA -- 2006



Secretary of Labor v. Cagle's Inc.   (OSHA Review Commission)

Chemical-specific training under HazComm standard

On 4/19/00, the NAM filed a brief urging the Secretary of Labor to hold that the Hazard Communication Standard, 29 C.F.R. § 1910.1200, does not require chemical-specific training. At present, the standard does not require that employers tell employees the name of each hazardous chemical, the hazard it poses and the precautions it requires. OSHA has now instructed its compliance officers that employers must make employees "specifically aware" which hazard category a chemical "falls within" -- which is chemical-specific training. That is an infeasible, if not impossible, burden to carry, for many of the Nation's workplaces contain hundreds or thousands of chemicals. Chemical-specific training is also of dubious worth because, as the Secretary's rulemakers have acknowledged, employees could not reliably recall the massive amount of chemical-specific information that would be required if the interpretation here were upheld. The standard makes clear that conveying chemical-specific information is the function of the material safety data sheet and the label.

The Review Commission ruled in September, 2006 that the hazard communication standard does not require employers to provide chemical-specific training. Instead, it allows them to provide chemical-specific training, but they can also satisfy the regulation by providing training about the categories of hazards present in a workplace, and where they are. Material safety data sheets are used to identify chemical-specific hazards.

 


Securities Regulation -- 2004



SEC v. Edwards   (U.S. Supreme Court)

Definition of securities

The Supreme Court 1/13/04 held unanimously that “an investment scheme promising a fixed rate of return can be an ‘investment contract’ and thus a ‘security’ subject to the federal securities laws.” In the case before the Court, investors had purchased payphones from a promoter’s subsidiary and had leased them back to the promoter in exchange for promises of fixed monthly payments. The Court reaffirmed that a contract is an “investment contract” if it “involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” This definition encompasses “the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” The appropriate focus is the promise of “profits” in the form of a financial return – whether fixed or variable – to the investor. The profits to the investor can be expected “to come solely from the efforts of others” even if the promised return is guaranteed by contract and does not depend upon the profitability of the investment scheme as a whole. This decision is important to all businesses engaged in activities that are, or could be, subject to SEC oversight.

 


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