The U.S. Court of Appeals for the District of Columbia Circuit issued an opinion yesterday reversing, on First Amendment grounds, the portion of the Securities and Exchange Commission’s conflict minerals rule requiring companies to disclose to the SEC and on their websites their products that are not found to be “DRC conflict free.” However, the court upheld the remainder of the rule, including the requirement to conduct country of origin inquiries and due diligence as well as the lack of a de minimis exception for reporting under the rule.
The conflict minerals rule was adopted by the SEC in 2012 in response to a directive contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It requires public companies to analyze, starting with calendar year 2013, whether any products they manufacture or contract to manufacture contain “conflict minerals,” defined currently as tantalum, tin, tungsten and gold, that are necessary to the functionality or production of those products. Issuers must then conduct a reasonable country of origin inquiry to determine whether the conflict minerals originated in the Democratic Republic of the Congo or its adjoining countries and must file a newly created “Form SD” with the SEC disclosing those results. With some limited exceptions, those who know or have reason to believe minerals necessary to their products were sourced from those regions must undertake extensive chain of custody due diligence to determine the minerals’ source and prepare an additional report that must be independently audited and filed with the SEC. For any products that have not been determined to be “DRC conflict free,” that is, the conflict minerals within the products did not directly or indirectly finance or benefit armed groups in the covered countries, issuers must provide a description of the product and other details related to the source of the minerals. During the first two years of reporting, the rule also provides relief for issuers who have not been able to ascertain the source of the minerals to be able to report a “conflicts undeterminable” status.
It is important to note that yesterday’s decision did not vacate the conflict minerals rule in its entirety, nor did it issue a stay on its implementation. However, because the decision strikes down a key element to the required disclosure — the ultimate conclusion and description of products that were determined to be DRC conflict-free — it is unclear how issuers’ reporting obligations are affected. Because we are rapidly approaching the initial filing deadline of June 2, 2014 (the first business day after the rule’s deadline of May 31, 2014), it is likely that in the next several days the SEC will clarify the conflict minerals rule’s reporting obligations in light of the new decision. Until then, or until a formal stay on the rule’s implementation is issued by the court, we advise that affected issuers continue to operate under the parameters established by the rule and the SEC’s existing guidance.
The challenges to Rule 13p-1 adopted by the SEC and the new Section 13(p)(1) of the Securities Exchange Act of 1934, as amended, were brought by the National Association of Manufacturers. After the district court rejected the challenges last year in a summary judgment for the SEC, the rule’s challengers appealed the decision to the D.C. Circuit Court. A copy of the appellate court’s decision on appeal is available here. The majority decision held that, under an intermediate standard of review under the Central Hudson case, the rule’s requirement to disclose products that are “not DRC conflict free” amounts to compelled speech in violation of the First Amendment. The court stated that:
“… it is far from clear that the description at issue — whether a product is “conflict free” — is factual and nonideological. Products and minerals do not fight conflicts. The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that “message” through “silence.” … By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”
McGuireWoods Conflict Minerals Compliance Team
In 2010 McGuireWoods established a cross-departmental conflict minerals legal compliance team dedicated to addressing the needs of public and private companies impacted by the conflict minerals rule. The team is a multidisciplinary group that includes attorneys from across our offices with substantive experience in (1) international natural resource and mining law, (2) supply chain management, (3) securities regulation and compliance, and (4) corporate investigations/due diligence. Having worked with a number of public and private companies in various industries, we are able to offer practical guidance in navigating the vagaries of the conflict minerals rule, identifying potential or real compliance obligations, and, finally, executing a path to corporate compliance and reporting.
Our previous client alerts relating to the conflict minerals rule are available here:
For additional information regarding the McGuireWoods conflict minerals team and how we can assist your company, please contact the authors.