Those public companies that must comply with the Securities and Exchange Commission’s Conflict Minerals Rule (Rule)1 should be aware that the three judge panel of the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Court of Appeals) that in April 2014 issued the original appellate decision (Original Decision) in National Association of Manufacturers v. SEC (NAM),2 a case that poses a challenge to the Rule’s validity, recently reaffirmed the Original Decision upon rehearing (Rehearing Decision and, together with the Original Decision, the Decisions).

Rehearing Decision

In the Rehearing Decision,3 the court reaffirmed its Original Decision that parts of Section 13(p) of the Exchange Act4 and the Rule:

“violate the First Amendment to the extent the statute and rule require regulated entities to report to the [SEC] and to state on their website that any of their products have ‘not been found to be ‘DRC conflict free.’’”5

The SEC and Amnesty International had petitioned for a rehearing in NAM after the D.C. Court of Appeals, sitting en banc, issued its decision in American Meat Institute v. U.S. Department of Agriculture (AMI),6 another case involving the First Amendment’s application. The SEC and Amnesty International had hoped the court would apply the First Amendment analysis of AMI in its rehearing of NAM and reverse the Original Decision. It should not come as a surprise if the SEC now petitions for a rehearing of the Decisions by the D.C. Court of Appeals, sitting en banc, which may well be friendlier to the SEC’s position than the three judge panel has been. The SEC could also petition the U.S. Supreme Court for certiorari. If the SEC does not petition for another rehearing or certiorari, the Decisions will become final and the case will go back to the district court for further action.

In the meantime, the stay of those parts of the Rule affected by the Original Decision that was issued by the SEC following the Original Decision (Stay)7 will remain in effect. However, the Decisions and the Stay do not affect the core elements of the Rule, including the supply chain due diligence and reporting requirements, and issuers must continue to comply with those requirements. Regardless of the direction in which NAM goes, the uncertainty regarding the Rule and how issuers should best comply with it will continue for the near future and possibly past the next Form SD filing deadline on May 31, 2016.

Practical Considerations

Issuers subject to the Rule remain in the same position as they have been since the June 2, 2014 filing deadline for the first ever Form SDs—they do not have to disclose that any of their products containing necessary conflict minerals8 (Conflict Products) have “not been found to be ‘DRC conflict free,’” but remain somewhat uncertain about how the Decisions, the Stay and the SEC’s guidance regarding the effect of the Original Decision on the Rule (Guidance)9 affect compliance with the Rule’s other requirements. Meanwhile, affected issuers must continue to comply with the Rule’s requirements that are not affected by the Decisions or the Stay and prepare for filing their Form SDs and, if necessary, their conflict minerals reports (CMRs) for the 2015 reporting year. When doing so, issuers should keep in mind the following:

  • The express language of paragraph (c)(2) of the Rule requires issuers having to file CMRs with the SEC to make certain disclosures regarding any Conflict Products that have not been found to be “DRC conflict free,” while the express language of Instruction 2 to Item 1.01 now requires issuers having a two-year transition period (Transition Period) under the Rule10 to describe as “having not been found to be ‘DRC conflict free’” those of their Conflict Products they could have previously described as being “DRC conflict undeterminable.” In the Guidance, Keith F. Higgins, the Director of the SEC’s Division of Corporation Finance, instructed issuers to continue to comply with and address those parts of the Rule the court in NAM upheld and noted that no issuer “is required to describe its products as ‘DRC conflict free,’ having ‘not been found to be ‘DRC conflict free,’’ or ‘not DRC conflict undeterminable.’” He also stated that, with respect to Conflict Products that are “not found to be ‘DRC conflict free’” or that are “DRC conflict undeterminable,” the issuer should still disclose in its CMR:
    • the facilities used to produce the conflict minerals in the products;
    • the country of origin of those conflict minerals; and
    • the issuer’s efforts to determine the mine or location of origin of those conflict minerals.

The Rule does not require issuers having to file CMRs to include in their CMRs any disclosure regarding Conflict Products found to be “DRC conflict free.” As a result, when an issuer makes in its CMR the disclosures described in the immediately preceding bullet points as to a Conflict Product that has not been found to be “DRC conflict free” and posts that disclosure on its website, the issuer will effectively, even if not expressly, be identifying those Conflict Products as “having not been found to be ‘DRC conflict free,'” the very disclosure the Decisions say issuers cannot be compelled to make. The Decisions do not expressly address the treatment of those other disclosure requirements of the Rule under the First Amendment and Director Higgins may or may not have considered the effect of making those other required disclosures in the context of the Rule’s overall disclosure requirements when issuing the Guidance. Whether the holding in the Decisions is intended to extend to those other disclosure requirements is unclear.

  • The Rule provides that issuers for which the Transition Period has passed no longer may classify and disclose a Conflict Product as being “DRC conflict undeterminable” in their CMRs. Moreover, the Rule no longer gives those issuers the pass they had during their Transition Period on disclosing the facilities used to process, or the country of origin of, any necessary conflict mineral in a Conflict Product if those facilities or that country of origin was not known to them and they could have classified and disclosed such Conflict Product as being “DRC conflict undeterminable” in their CMRs for their Transition Period. The Rule’s provisions do not provide an issuer with any relief from the Rule’s requirement that such facilities and country of origin be disclosed for a Conflict Product that has “not been found to be ‘DRC conflict free,’” even if the issuer, despite extensive due diligence, is unable to identify those facilities or the country of origin. As a result, those issuers that have had have difficulties obtaining such information about the necessary conflict minerals in their Conflict Products in past reporting years and continue to have such difficulties should step up their due diligence efforts to obtain that information in order to comply with the Rule in their post-Transition Period compliance environment.
  • The Guidance indicated that, “pending further action,” unless an issuer voluntarily describes one of its products as being “DRC conflict free” in its CMR, no independent private sector audit (IPSA) will be required of the CMR.11 Issuers for which the Transition Period has ended are left to ponder, however, whether the SEC, having no expectation that the uncertainties over the Rule would continue for so long, intended for that element of the Guidance to continue to apply for reporting years following an issuer’s Transition Period. Perhaps the SEC will not revisit that portion of the Guidance and issuers will not be faced with having to obtain an IPSA of their CMRs for the 2015 reporting year.

The Original Decision, the Stay and the Guidance can be seen as having created something of a quandary for issuers with respect to what the Rule, as it is effectively modified by the Original Decision, compels issuers to disclose in CMRs and how to comply with the Rule in other respects. Issuers having products containing conflict minerals that are not, or may not be, “DRC conflict free” should watch for future SEC guidance on compliance with the Rule, which is badly needed, and for further developments in NAM.