On April 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit issued its opinion in the conflicts minerals case, National Association of Manufacturers, et al., v. Securities and Exchange Commission. The Court of Appeals upheld most aspects of the statute and the rule, but found that the statute and rule violate the First Amendment “to the extent that the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have not been found to be ‘DRC conflict free.’” The Court of Appeals remanded the case to the U.S. District Court for the District of Columbia for further proceedings consistent with its opinion. As of this time, there is no reprieve for issuers from the requirement to file a Form SD or conflict minerals report with the Securities and Exchange Commission (SEC) by June 2, 2014.
Background
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required that the SEC issue regulations requiring firms using “conflict minerals” to investigate and disclose the origins of those minerals. The SEC’s rule applies to issuers that file reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) and for whom conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured.
“Conflict minerals” are used in many different types of products and are defined as cassiterite, columbite-tantalite, gold, wolframite and their derivatives, tantalum, tin and tungsten. Many non-SEC reporting companies also have been impacted by the scope of the rule’s “reasonable country of origin” (RCOI) and supply chain due diligence provisions, notwithstanding the fact that the rule only applies to issuers. For more on the adoption of the conflict minerals rules and the specific requirements, see Drinker Biddle’s September 2013 Client Alert.
Court Ruling
The National Association of Manufacturers challenged the SEC’s final rule, raising Administrative Procedure Act (APA), Exchange Act and First Amendment claims. The District Court rejected all of those claims and granted summary judgment for the SEC and intervenor Amnesty International. On appeal, the Court of Appeals affirmed the District Court’s ruling on the APA and Exchange Act claims, but reversed the ruling on the First Amendment claim.
In particular, the Court of Appeals found that the requirement to disclose that products are not “DRC conflict free” violates the prohibition against compelled speech. The court explained:
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 . . . 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.
The Court of Appeals found insufficient the SEC’s argument that issuers could explain the meaning of “conflict free,” stating that “the right to explain compelled speech is present in almost every such case and is inadequate to cure a First Amendment violation.” Also of note, the Court of Appeals found that the SEC did not act arbitrarily and capriciously by choosing not to include a de minimis exception to the conflict minerals rules. As conflict minerals are often used in limited amounts, the Court of Appeals found that a de minimis exception could leave small quantities of conflict minerals unmonitored across many issuers.
Implications
Unfortunately for many issuers who are racing to complete their specialized disclosure report on Form SD and their first conflict minerals report, due by June 2, 2014, there is no reprieve from that deadline at this time. While it is difficult to predict what action the SEC may take, it is possible that the SEC could seek further review of the rule, could stay the upcoming filing deadline in light of the ongoing proceedings, or could otherwise clarify its expectations regarding disclosure obligations, although there are no guarantees. Given that uncertainty, it would be wise for issuers to continue to work on their Form SD and conflict minerals report unless and until the SEC takes further action.
Because the Court of Appeals upheld most aspects of the conflict minerals statute and rule, the due diligence requirements remain intact, and it is possible that they could survive with modified disclosure requirements. Therefore, notwithstanding the Court of Appeals ruling, it is advisable that SEC reporting companies continue their due diligence efforts. For those companies who are not SEC reporting companies but who are nonetheless impacted by the conflict minerals rule via the required RCOI and supply chain due diligence process, it is advisable to continue responding to RCOI and due diligence inquiries.
