On April 14, 2014, the Court of Appeals for the D.C. Circuit issued its opinion on the challenge to the conflict minerals rule brought by the National Association of Manufacturers, among others. The district court previously had granted summary judgment in favor of the Securities and Exchange Commission, rejecting each claim brought by the National Association of Manufacturers (including that the SEC should have established a de minimis threshold for the application of the rule, failed to conduct an appropriate cost-benefit analysis and erred when it applied the rule not only to manufacturers of products that contain conflict minerals, but also those who “contract to manufacture” such products). View the Court of Appeals decision here.
The Court of Appeals upheld the district court’s decision, with one important exception. The Court found that Section 13(p)(1) of the Exchange Act and Rule 13p-1 promulgated there under violated the First Amendment by requiring issuers to describe the products that they manufacture, or contract to manufacture, as “not DRC conflict free” and to make such information publicly available on the issuer’s website. In its decision, the Court noted that it was unclear whether the “conflict free” label was “factual and non-ideological” and that the statute and the rule unconstitutionally “interfere with the exercise of the freedom of speech of the First Amendment.” Specifically, the Court stated:
The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war. This label requires issuers to tell consumers that their 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.”
The Court remanded the case for further proceedings, consistent with the Court’s opinion, at the district court level. The Court of Appeals decision is not yet binding; it stated in a concurrent opinion that it will not issue its mandate until seven days after it disposes of any petition for rehearing.
On April 28, 2014, SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar issued a joint statement on the Court of Appeals’ decision, stating unequivocally that they “…believe that the entirety of the [conflict minerals] rule should be stayed, and no further regulatory obligations should be imposed, pending the outcome of th[e] litigation.” Commissioners Gallagher and Piwowar further indicated that they believe “[a] full stay is essential because the district court could (and, in our view, should) determine that the entire rule is invalid.”
On April 29, 2014, SEC Chair Mary Jo White indicated during Congressional testimony that the SEC will not stay the entire conflict minerals rule and that companies should plan to comply with the portions of the rule that were “clearly upheld” by the Court of Appeals.
Following Chair White’s remarks, Keith Higgins, Director for the SEC’s Division of Corporation Finance, issued a statement on the impact of the Court of Appeals decision and stating that “the Division expects companies to file any reports required under Rule 13p-1 on or before the due date,” subject to the guidance contained in the Division’s statement. View the Division’s guidance here.
The Division’s guidance is:
- The Form SD and Conflict Minerals Report, if applicable, should address the components of the conflict minerals rule upheld by the Court of Appeals.
- Issuers filing on Form SD, without the related Conflict Minerals Report, “should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook.”
- Issuers who must file a Conflict Minerals Report, either because they know that conflict minerals originated in the DRC or an adjoining country and are not from recycled or scrap sources or have reason to believe that conflict minerals may have originated in the DRC or an adjoin¬ing country and may not be from recycled or scrap sources, “should include [in the Conflict Minerals Report] a description of the due diligence that the company undertook.”
- Issuers that have identified products falling within Form SD Items 1.01(c)(2) or 1.01(c)(2)(i) because they have not found to be “DRC conflict free” or are “DRC conflict undeterminable” do not need to specifically identify the products as such but must describe the products, the facilities used to process the conflict minerals in those products, the country of origin of the conflict minerals in those products and the efforts to determine the mine or location of origin with the greatest possible specificity. Note that issuers with products that fall within the scope of Form SD Item 1.01(c)(2)(i) need only describe the facilities used to process the conflict minerals in the products or the country of origin to the extent that this information is known to the issuer.
- As a result of the Court of Appeals decision, issuers are not required to identify their products in the Form SD or Conflict Minerals Report, if any, as “DRC conflict free,” having “not been found to be ‘DRC conflict free,” or “DRC conflict undeterminable.”
- Issuers that have obtained an independent private sector audit may identify products as “DRC conflict free” in their Conflict Minerals Report on a voluntary basis.
On May 2, 2014, the SEC issued a formal order that stayed the portion of the conflict minerals rule declared to be unconstitutional by the Court of Appeals, pending completion of judicial review. Consistent with Chair White’s prior remarks, the SEC has declined to stay the entire rule. Issuers, therefore, should continue to prepare for the disclosure requirements mandated by the remainder of the conflict minerals rule, in line with the April 29, 2014 guidance provided by the Division of Corporation Finance.
The SEC has imposed an initial disclosure deadline for the conflict minerals rules of May 31, 2014, which falls on a Saturday. This means that issuers must file their Form SD and Conflict Minerals Report, if applicable, by Monday, June 2, 2014.
We will continue to monitor this topic and provide additional guidance, as appropriate.