In the end, it’s pretty simple. The court held the conflicts minerals rule and statute embodied in Dodd-Frank violate the First Amendment to the extent the statute and rule require regulated entities 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.”
The core logic of the holding is found in this passage:
“At all events, it is far from clear that the description at issue—whether a product is “conflict free”—is factual and nonideological. Products and minerals do not fight conflicts. The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that “message” through “silence.” By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment” (citations omitted).
As is usual, the standard of review is determinative. Among other things, the court found that a rational review basis is not appropriate because in First Amendment cases rational review “is the exception, not the rule” and is only applied where “disclosure requirements are reasonably related to the State’s interest in preventing deception of consumers.”
So what’s next, other than a possible appeal? Alternatives may be:
- The case is reheard en banc, and possibly consolidated with another pending case captioned “American Meat Institute v. United States Department of Agriculture.” See footnote 9 and the opinion concurring in part. The American Meat case apparently includes an identical question on the standard of review.
- The SEC finds a work-around rule, that satisfies the court’s reasoning, and doesn’t call into question the constitutionality of the Dodd-Frank Act (See footnote 14 to the opinion). Theoretically, this could be implemented fairly easily, by retaining all parts of the rule, other than the requirement to describe products as “having not been found to be DRC conflict free.”
- The SEC believes the Dodd-Frank Act is fatally defective and waits for Congress to act.
So should issuers suspend all efforts on conflict minerals compliance? That decision should be made based on public relations in general and other policy considerations – many issuers will continue to strive for a conflict free supply chain. Your good customers may expect you to continue to scrub your supply chain. In fact, I believe issuers should now begin to think about how they are going to explain their next steps to investors, customers and other constituents.
As to the more granular question about suspending compliance with the SEC’s rules, it’s a little early to tell, but may be the only reason you are reading this blog. Note that the SEC did not stay the rule, and as noted in the second bullet point above, a work-around might be fairly easy.
I suspect we’ll hear from the SEC shortly on the path forward. But absent that, the court did say the SEC and Congress cannot compel an issuer to confess blood on its hands, as that interferes with that exercise of the freedom of speech under the First Amendment.