On April 14, the US Court of Appeals for the DC Circuit stuck down portions of the Security and Exchange Commission’s (SEC) Final Rule on Conflict Minerals (Final Rule) as unconstitutional. In National Association of Manufacturers v. Securities and Exchange Commission, the Court held that requiring regulated entities to report to the SEC and on their website that their products have “not been found to be ‘DRC conflict free’” violated the First Amendment. The decision raises important questions as the first reports to publicly disclose use of “conflict minerals” pursuant to the Final Rule are coming due on June 2, 2014.1
The ultimate effect of the decision is unclear, however, as the free speech holding may be affected by an upcomingen banc decision of the Court in American Meat Institute v. United States Department of Agriculture (the hearing is scheduled for May 19, 2014). While it remains to be seen how the SEC will respond to the Court’s decision, with the reporting deadline looming, it is recommended that regulated entities continue to comply with the Final Rule.
“Entities subject to the Final Rule are companies that file reports with the SEC under the Securities Exchange Act and that use the minerals ... which are ‘necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company.’”
Congress added Section 1502 to the Dodd-Frank Act because of concerns that the exploitations of certain minerals are being used to finance conflict in the Democratic Republic of the Congo (DRC) and thus contributing to an emergency humanitarian situation there. Section 1502 requires the SEC to adopt regulations requiring certain companies to investigate and disclose their use of these conflict minerals and whether these minerals are sourced from the DRC or adjoining countries.
Entities subject to the Final Rule are companies that file reports with the SEC under the Securities Exchange Act and that use the minerals tantalum, tin, gold, or tungsten (conflict minerals) which are “necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company.” There is no de minimis exception.
Regulated companies must:
- Investigate to determine the country of origin of the minerals used by the company, which includes:
- an initial good faith inquiry reasonably designed to determine whether any of the minerals used by the company in its products originated in the Democratic Republic of the Congo or an adjoining country or are from scrap or recycled sources;
- if red flags are raised during this initial inquiry, due diligence as to the source and chain of custody of its conflict minerals.
- File a report with the SEC on Form SD and on its own website with its results, including whether or not the company’s products are considered to be “DRC conflict free.” The level of reporting required under the Final Rule depends on the outcome of each of the steps of inquiry and may include an independent private sector audit of its report.
This Final Rule is likely to impact companies beyond those directly regulated because of the initial inquiry and due diligence requirements. Thus companies in the supply chain of the regulated companies should be prepared for requests for similar inquiries, due diligence, and reporting by their regulated customers.
Arent Fox is available to assist companies to determine whether the Final Rule affects them. If it does, the firm can assist these companies with their conflict minerals compliance efforts and reporting, including the designing and developing of a conflict minerals program, and managing and administering the reasonable country of origin inquiries and due diligence.