May 26, 2019

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Whose Role is it Anyway? Unanswered Questions About Social, Political, or Environmental Corporate Disclosures

The D.C. Circuit attracted plenty of attention by ruling that one of the SEC’s conflict mineral disclosure rules – promulgated pursuant to a specific Congressional mandate in the Dodd-Frank Act – violated the First Amendment. In National Association of Manufacturers v. Securities and Exchange Commission, the court held that the rule ran afoul of the Bill of Rights by requiring public companies to publicly confess if their products are (or are not) “DRC conflict free.” The court reasoned that imposing such a requirement amounted to unconstitutionally compelled commercial speech by “compelling an issuer to confess blood on its hands…”.

Predictably, there has been plenty of debate over whether the SEC still achieves its conflict mineral goals without the (unconstitutional) “compelled disclosure” provision, and whether the SEC should have stood down on the remainder of its rule, at least for now. But the bigger question, which goes well beyond conflict minerals, remains: should the SEC or should Congress require the SEC — which has a broad investor protection mandate and (presumably) limited resources — to prioritize social or environmental disclosure issues in the first instance?  The D.C. Circuit subtly criticized Congress for putting this issue on the SEC’s plate by noting how the Dodd-Frank Act required the SEC, “the agency normally charged with policing America’s financial markets,” to issue rules requiring the conflict mineral disclosures.

There is no shortage of socially, politically and environmentally interesting information that some investors may personally want to learn about — conflict minerals, potential impacts on climate change, and so forth. But that doesn’t mean that prioritizing this sort of disclosure agenda makes our open securities markets any safer or more efficient. Of course, even if the national origin of a public company’s tin, tungsten or gold in some sense is “material,” more disclosure isn’t necessarily more meaningful disclosure about an issuer’s position and prospects, especially if mandated in periodic filings that are often long and unwieldy.    Nor would it be easier to assess the investment quality (as opposed to morality) of an issuer if, by further example, Congress required issuers to disclose the labor conditions of their factories abroad or the depth of the commitment to workplace recycling.

The conflict mineral constitutional speed bump is a prime opportunity to ask, again, if investor and market protection objectives would be best served by sharper SEC focus by all involved — Congress, SEC, investor advocates — on core disclosure items, i.e.,  financials, prospects, risks, and corporate governance?

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