In National Association of Manufacturers v. SEC, No. 12-1422 (D.C. Cir.), certain trade groups are challenging the Securities and Exchange Commission’s (the “SEC”) final rule, regarding the disclosure and reporting requirement of the use of “conflict minerals”1 from the Democratic Republic of Congo (“DRC”) and its adjoining countries in a company’s products.2 Detecting the use and origin of conflict minerals will likely be a costly and time-consuming task for companies that are subject to the Rule. The results of this case could affect the manner and extent of due diligence that companies are required to perform to detect whether their products use conflict minerals. The following provides a brief summary of the Rule and the Trade Groups' arguments.
The Rule, which applies to any SEC reporting company, sets forth a three step process for compliance:
- There is required disclosure of any conflict minerals that are necessary to the functionality of a product manufactured or contracted to be manufactured;
- Issuers that determine that they are subject to the Rule must then conduct, in good faith, a reasonable inquiry into the country of origin of their conflict minerals or whether they are from restricted persons; and
- If an issuer has reason to believe its conflict minerals originated in a “covered country” (and are not recycled), the issuer must file a conflict mineral report as an exhibit to Form SD and publish such report on its website.
Affected issuers are required to make their conflict minerals disclosure annually on a calendar year basis for the year 2013, no later than May 31, 2014. Issuers determining the conflict minerals used were recycled or did not originate in the “covered countries” are required to file Form SD, but not a conflict minerals report.
The Trade Groups' Argument for Invalidity
On January 16, 2013, National Association of Manufacturers, Chamber of Commerce of the United States of America, and Business Roundtable (the “Trade Groups”) filed a brief with the United States Court of Appeals for the D.C. Circuit asserting that the Rule was invalid and that it violated the First Amendment. Specifically, the Trade Groups argue in their lawsuit that:
- The SEC did not satisfy its obligation to weigh the economic benefits and detriments of implementing the Rule. The SEC has acknowledged that it could not quantify the potential benefit of adopting the Rule. The Trade Groups, however, have estimated that the total cost of implementing the Rule could be $9 to $16 billion.
- The Rule is unnecessarily costly and would impose obligations in excess of what is required under the Dodd-Frank Act. Most notably, the SEC declined to adopt a de minimis exception to the Rule. Thus, any minute or trace amounts of conflict minerals in a company’s products trigger disclosure obligations under the Rule.
- The Rule compels speech in violation of the First Amendment. Companies unable to trace the origin of minerals used in their products or that have identified that their products use conflict minerals must submit SEC filings and disclose on their website that their products have “not been found to be DRC conflict free.” According to the Trade Groups, this requirement does not advance a government interest because there is no evidence the requirement will minimize the sale of conflict minerals.