Following the recent decision by the US Court of Appeals for the District of Columbia (the "DC Circuit"), the Securities and Exchange Commission (the "SEC") issued guidance on how the DC Circuit ruling affects implementation of Exchange Rule 13p-1 (the "Rule"). The DC Circuit struck those portions of the Rule that would have required certain reporting companies to describe their products as "not DRC conflict free" in the annual disclosures relating to their use of specified "conflict minerals" originating in the Democratic Republic of the Congo ("DRC") and certain adjoining countries. The SEC now has released a statement amending, but not entirely staying, the requirements of the Rule in preparation for the first reports due on June 2, 2014.
As described in a previous Client Alert, on April 14, 2014 the DC Circuit partially invalidated on free speech grounds the portion of the Rule that requires companies to describe certain products in their SEC filings (and on their websites) as "not DRC conflict free." Specifically, the DC Circuit held that the government could not compel companies to label their products with what might be viewed as a negative and morally charged designation.
On April 28, 2014, SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar urged the SEC to stay the Rule in its entirety pending final resolution of the litigation. The Commissioners stated that the First Amendment violations noted by the DC Circuit "permeate all the required disclosures", arguing that a stay would thereby save "compliance costs, and ease the problem of information overload by eliminating special interest disclosures that are immaterial to investment decisions."
On April 29, 2014, Keith F. Higgins, Director, SEC Division of Corporation Finance, rejected that argument stating that, subject to any further action that may be taken either by the SEC or a court, the SEC will continue to expect all reports (including the new Form SD) required under the Rule to be submitted by the June 2, 2014 deadline. In light of the DC Circuit's decision however, no company will be required to label its products in specific terms, including "not DRC conflict free," "DRC conflict free" or "DRC conflict undeterminable." For products that would have been found "DRC conflict undeterminable" or "not DRC conflict free," companies 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" as appropriate. Companies that voluntarily elect to describe any of their products as "DRC conflict free" must obtain an independent audit to that effect as otherwise required by the Rule; however, no independent audit is required if no products are voluntarily identified as "DRC conflict free". Therefore, we expect that companies will opt not to specifically characterize their products as "DRC conflict free" in their upcoming Conflict Minerals Reports in order to avoid triggering the obligation to seek an independent audit.