On August 18, 2015, the U.S. Court of Appeals for the District of Columbia Circuit affirmed its April 14, 2014 decision in National Association of Manufacturers v. SEC upholding in part and invalidating in part the SEC’s conflict minerals disclosure rule. In its 2014 opinion, a split three-judge panel of the court struck down, on First Amendment grounds, the portion of the rule that requires companies to describe products as not having been found to be “DRC conflict free.” The SEC petitioned for rehearing and, in its new decision, the panel affirmed its prior holding, again by a 2-1 vote.
The August 18 decision will have no immediate effect on current conflict minerals reporting. Following the 2014 judicial decision, the SEC issued guidance stating that companies were still required to comply with the rule, except that no company would be required to describe its products as “DRC conflict free,” as “not found to be DRC conflict free,” or as “DRC conflict undeterminable.” If a company chooses voluntarily to describe a product as “DRC conflict free,” it may do so, provided it also obtains an independent private sector audit (IPSA) of whether the company’s conflict minerals diligence framework conforms to a recognized framework and whether the description of the company’s diligence measures is consistent with the process the company actually undertook. The guidance adds that, “pending further action,” an IPSA will not be required unless a company voluntarily uses the term “DRC conflict free” to describe a product. Just six companies elected to obtain IPSAs with respect to their 2014 reporting year Conflict Minerals Reports.
The SEC’s 2014 guidance remains in effect. As a result, for 2015 a company subject to the rule must conduct a reasonable country of origin inquiry (RCOI) to determine whether any conflict minerals used in its products originated in the Democratic Republic of the Congo or its neighbors. If, based on the RCOI, the company has no reason to believe that its minerals may have originated in the covered countries, the company must provide a description of the RCOI on Form SD. Otherwise, the company must undertake due diligence on the source and chain of custody of its conflict minerals and file a Conflict Minerals Report. While it need not label products as “conflict free” or “not conflict free,” that report must describe the company’s diligence, the facilities used to produce the conflict minerals, the country of origin of the minerals, and the efforts to determine the mine or location of origin.
Beginning with the 2015 reporting year, the conflict minerals rule, as originally adopted, would require all large companies that file a Conflict Minerals Report to obtain an IPSA, regardless of whether they conclude their products are DRC conflict free. However, unless the SEC changes its 2014 guidance, IPSAs will apparently not be required for 2015, except for voluntary “DRC conflict free” disclosures. Nonetheless, we expect that more companies will consider obtaining IPSAs this year in response to customer expectations or the demands of outside groups that monitor supply chain sourcing practices in particular industries. The SEC will eventually need to clarify whether and when the IPSA requirement will take effect.
It is likely that the SEC will issue additional conflict minerals reporting guidance in the wake of the new court of appeals decision. It is also possible that litigation challenging the constitutionality of the rule will continue. The SEC could for example again seek, as it did in 2014, to have the full 11-member court of appeals review the panel decision. However, absent further Commission guidance or judicial action, companies should plan to continue to comply with the SEC’s conflict minerals reporting requirements, as modified by the 2014 guidance.
A copy of the court’s opinion is available here.