• Decision maintains the status quo
  • SEC may seek Supreme Court review – or not

The U.S. Court of Appeals for the D.C. Circuit has denied the petitions for rehearing en banc sought by the Securities and Exchange Commission ("SEC") and Amnesty International in the ongoing court battle over the constitutionality of the SEC’s conflict minerals rule. The court ruled in April 2014 that a portion of the conflict minerals rule was unconstitutional. As discussed here in our August 2015 client alert, after rehearing, the court affirmed its prior judgment in a 3-2 decision, holding that Section 1502 of the Dodd-Frank Act and the SEC’s final conflict minerals rule "violate the First Amendment to the extent the statute and the rule require [issuers] 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.’’" National Association of Manufacturers v. SEC, No. 13-5252, at 25 (D.C. Cir. 2015).

So, once again, issuers are left with the status quo from April of 2014 – at least for now. As discussed here in our April 2014 client alert, the SEC staff issued guidance on April 29, 2014 following the court’s prior ruling. In that guidance, the staff stated that, subject to further action that could be taken by the Commission or by the courts, it expected compliance of those parts of the rule that the court had upheld. Issuers were to file timely the reports required by the rule, with the caveat that companies need not describe products as "DRC conflict free," "DRC conflict undeterminable" or "not found to be ‘DRC conflict free’". The staff stated that an audit would not be required unless a company voluntarily elected to describe a product as "DRC conflict free".

At the PLI Securities Regulation Institute held last week, just days before the court’s ruling on the SEC’s petition for rehearing, Keith Higgins, Director of the SEC’s Division of Corporation Finance, stated that the April 2014 staff guidance would continue to apply during the pendency of the litigation and should be followed for conflict minerals reports to be filed in 2016. Mr. Higgins stated that timing issues would be taken into consideration by the SEC in connection with any changes, acknowledging the need for advance notice to issuers of a shift from existing guidance. Mr. Higgins addressed a question about the permissibility of an issuer labeling products as "DRC undeterminable" in reports to be filed in 2016. He stated that because the SEC is not requiring any label in connection with the rule, issuers may make their own decisions on using that label.

The SEC now must decide what it will do next. It has 90 days from the November 9 ruling to file a petition for writ of certiorari to the U.S. Supreme Court. Given the SEC’s arguments in its petition for rehearing that the court’s prior decision could have an adverse effect on other SEC disclosure requirements, some expect that the SEC will seek Supreme Court review of the August decision. If the SEC does not seek such review, or if its petition is denied, the case will be returned to the District Court for further proceedings. Either way, it is unlikely that this litigation will conclude any time soon and almost certainly not before issuers must file their 2015 reports in 2016.

So issuers must continue their conflict minerals programs and remain focused on supply chain compliance. Stated generally, under the conflict minerals rule as currently in effect, issuers must

  • determine whether the rule applies to their business; and
  • if the rule applies, conduct a reasonable country of origin inquiry to determine whether any of the products they manufacture or contract to manufacture contain any of the designated "conflict minerals" (tin, tungsten, tantalum and gold) that come from one of the covered countries; and
  • if any of those minerals do come from a covered country, conduct diligence on their supply chain and file a conflict minerals report on Form SD.

Because of the court’s prior ruling, issuers are not required to state in their Form SD or related report whether their products are determined to be "DRC conflict free" or "not found to be ‘DRC conflict free’" and, pursuant to the staff’s recently confirmed guidance, are not required to obtain an independent audit as originally required under the rule, unless the issuer chooses to describe any of its products as "DRC conflict free." Nonetheless, it remains advisable for issuers to continue to document the procedures used and due diligence conducted in their compliance efforts under the conflict minerals rule.