NAM v. SEC: Corporations Can Say As Much As They Want and Only What They Want

Since 2010, companies were required to disclose whether they obtained minerals from conflict zones in central Africa under the Dodd-Frank Consumer Protection Act.  Last week, the D.C. Circuit Court of Appeals struck down part of the Security Exchange Commission’s (SEC- the federal agency responsible for implementing securities laws) rule which would require companies to actually label their products as “Democratic Republic of Congo conflict free”.  Companies who use minerals like tantalum, tungsten, or gold, still have to disclose the due diligence that they’ve undertaken to figure out whether their minerals come from conflict zones, and they still have to say whether those minerals come from the DRC. They don’t however have to label it as “conflict free”.

In Citizens United, the Supreme Court said that corporations can “say” (read: spend) as much as they want on election communications. That opinion has been bad for our democracy, but the reasoning – more speech, no matter its source, is better for us all – has some logical resonance. That is in part why National Association of Manufacturers (NAM) v. SEC makes so little sense to me. In NAM, the D.C. Circuit held that corporations have a first amendment right to withhold truthful information about their operations, specifically whether they are “conflict free”. This means, of course, that there is less speech (for us all to benefit from).

So why did the D.C. Circuit decide to strike down the conflict minerals disclosure rule . . . again? The opinion is a bit wonky, but in short, the court thinks that SEC cannot require any disclosure if that disclosure is not connected to some sort of advertisement or public representation (at least not without a powerful showing by the SEC that the disclosure is critical to an important governmental interest).

According to the Majority opinion, because these companies have not voluntarily stepped into the public sphere, the government cannot make them do that. And that’s where they lose me. These companies have stepped into the public sphere; they all publicly market their shares on public exchanges. And the only information they would be forced to disclose (on their website and in reports to the SEC) would be truthful (albeit a tad normative). There is no real reason to suspect that the government has any nefarious motive, which is the usual trigger for strict constitutional scrutiny. And, the SEC requires all sorts of disclosure from publicly listed companies.

So why is this one different? The court seems to have three primary concerns: first, the SEC admitted that the disclosure is not about educating investors but rather it is intended to achieve other “overall social benefits,” second, the SEC produced little evidence that disclosure would achieve those other “social benefits”, and, third, requiring the company to label its operations “conflict free” or “non-conflict free” is normative (and not purely factual).

I could (with more space) take issue with each of these complaints but the big take-away for me is that the SEC could pass a very similar rule tomorrow (or more likely a year from now) that would pass constitutional muster. The SEC could make a determination that whether a company is sourcing its minerals from conflict areas is material to an investment decision; the SEC could lay a better factual record (as opposed to making post-hoc justifications); and, the SEC could require country-based disclosures (or something less evaluative than “conflict free”). And then everything would be dandy.

I don’t think that this decision marks the end of transparency; and I don’t think that campaigners should shy away from pressing the SEC to create disclosure regimes. I do think it might take more work and that it puts a greater burden on the SEC to get to a rule that passes judicial scrutiny. And that is a problem.