On April 14, the Court of Appeals for the District of Columbia Circuit issued a decision holding part of the SEC’s conflict minerals reporting rule unconstitutional. Undeterred, on April 29, the SEC released staff guidance stating that the June 2, 2014 deadline for the first conflict minerals filings will remain in effect – with modifications to the disclosure requirements to address the Court’s concerns. However, two of the five Commissioners published a joint statement urging that conflict minerals reporting be postponed until the end of all litigation concerning the rule. On May 2, the Commission issued an order in effect adopting the staff guidance by staying the part of the rule the Court invalidated and denying a request by the National Association of Manufacturers, the Chamber of Commerce, and the Business Roundtable to delay the entire rule.
As described in the August 2013 Update, the Dodd-Frank Act directed the SEC to adopt disclosure requirements applicable to companies that manufacture, or contract for the manufacture of, products as to which “conflict minerals” are necessary to the product’s production or functionality. Companies are required to determine whether tin, tantalum, tungsten, or gold in their products originated in the Democratic Republic of the Congo and neighboring countries and, if so, whether they are from sources that support armed conflict in the DRC.
7 Update │ May 2014
In its decision, the Court of Appeals held that the statute and the SEC’s conflict minerals rule violate the First Amendment to the Constitution to the extent that companies are required “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.’” Essentially, the Court determined that companies could not be compelled to describe their products as “ethically tainted.” The Court noted that there were no First Amendment objections to other aspects of the conflict minerals rule, such as the requirement that companies describe the due diligence process by which they determine the source of conflict minerals in their products.
The Court’s decision resulted in questions about whether companies would still be required to file conflict minerals disclosures in 2014. The guidance issued by the Director of the SEC’s Division of Corporation Finance on April 29 states that the Division still expects companies to file reports required under the rule on or before the existing filing date – June 2, 2014. These filings, on Form SD, and any related conflict minerals report, should comply with the portions of the rule that the court upheld. The guidance explains that this means –
Companies subject to the rule that do not need to file a conflict minerals report (because they determine that conflict minerals in their products do not originate in the DRC or neighboring countries) should disclose their reasonable country of origin inquiry on Form SD. Companies that are required to file a conflict minerals report should include in that report a description of the due diligence that the company undertook regarding conflict minerals sources.
In its conflict minerals report, a company does not need to describe products as “DRC conflict undeterminable” or “not found to be ‘DRC conflict free.’” For such products, the company should disclose 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.
The independent private sector audits required under the rule need not be obtained unless a company wishes voluntarily to describe a product as “DRC conflict free.” If so, the company must obtain an independent private sector audit as part of its due diligence.
The day prior to the issuance of the staff guidance, two SEC Commissioners issued a joint statement urging that the rule be suspended until all of the judicial proceedings concerning it were completed. Commissioners Daniel Gallagher and Michael Piwowar stated:
“[T]he wisest course of action would be for the Commission to stay the effectiveness of the entire rule until the litigation has concluded. Marching ahead with some portion of the rule that might ultimately be invalidated is a waste of the Commission’s time and resources—far too much of which have been spent on this rule already—and a waste of vast sums of shareholder money. A full stay of the effective and compliance dates of the conflict minerals rule would not fix the damage this rule has already caused, but it would at least stanch some of the bleeding.”
8 Update │ May 2014
On May 2, the Commission (presumably by a 3-2 vote) issued an order delaying only the part of the rule the Court had found unconstitutional and refusing to delay the balance. On May 5, the National Association of Manufacturers, the Chamber of Commerce, and the Business Roundtable filed a motion asking the Court of Appeals to delay the June 2 filing deadline pending further judicial proceedings.
Comment: It seems unlikely that the Court of Appeals will agree to delay the 2014 filing deadline, since the Commission has already agreed not to enforce the part of the rule the Court held unconstitutional. Therefore, companies subject to conflict minerals reporting should plan to file Form SD by June 2. In the longer term, while it is still possible that further judicial proceedings will invalidate the rule, it is more likely that conflict minerals reporting in some form is here to stay. Audit committees should make sure that management is on track to implement due diligence procedures to identify the source of conflict minerals in company products so that the company will be able to comply with the reporting requirements when the “undeterminable” label is no longer available.