SEC Conflict Minerals Rule Legal Challenge is Over – But Not For Good
What Just Happened?
April 7, 2016 was the deadline for filing a petition for writ of certiorari to the US Supreme Court seeking a review of the court of appeals’ decision on the conflict minerals rule. The SEC did not file the petition, and Amnesty International (the intervenor in the case) did not make the filing either.
In her March 4, 2016 letter to House Speaker Paul Ryan explaining the government’s decision not to file the petition for a writ of certiorari, Attorney General Loretta Lynch walked through key elements of the court of appeals’ decision and offered a glimpse into the next procedural steps for the rule. First, she recited the court’s decision that the conflict minerals rule’s disclosure requirements:
violate the First Amendment to the extent [they] require regulated entities to report…that any of their products have “not been found to be ‘DRC conflict free.’”
She went on to highlight that the court of appeals’ majority opinion specifically noted that its ruling may not only apply to the conflict minerals rule but also to the statute that required the SEC to create the rule — Section 1502 of the Dodd-Frank Act. It is yet to be determined whether the offending product descriptor (disclosing that a product has “not been found to be ‘DRC conflict free’”) was required by Section 1502. Therefore, it is yet to be determined whether the court’s judgment about the First Amendment violation will apply to the SEC’s conflict minerals rule and the statute or just the SEC rule. As a result of the court of appeals’ original decision (which was confirmed in August 2015), the case was to be remanded to the district court “for further proceedings consistent with [the court of appeals’] opinion.” That remand was put on hold during the appeals process. So, the remand will now occur, and we can be sure that the issues highlighted in Attorney General Lynch’s letter will be addressed in those proceedings.
Following the August 2015 court of appeals’ ruling, there was a hue and cry by non-governmental organizations and others about the ruling and its implications. But, that commentary focused more on the impact of the ruling on regulatory disclosure requirements in general than on the need for the specific conflict minerals product descriptor that was found to be unconstitutional. Some of the commentary expressed concern that few disclosure requirements would survive First Amendment scrutiny and that companies’ free speech claims would now trump any and all disclosure and reporting obligations. But, the SEC and the Justice Department must not have shared those concerns.
Keep in mind – as noted above, the ruling of the court of appeals was a narrow one. Without going through all the analysis about standards of review for commercial First Amendment cases, the bottom line is that the court of appeals determined that requiring a company to make a statement in an SEC filing posted to its website that its products were “not found to be ‘DRC conflict-free’” was too much under these circumstances. The decision did not reach conclusions about listing of product ingredients or about point of sale country of origin labeling. And, the ruling was not a decision about health and safety disclosures or disclosure aimed at economic or investor protection.
What Does This Mean?
What does all this mean for companies that are preparing their calendar year 2015 reports (due by May 31, 2016)? In short — as of today, the decision of the SEC not to file the petition for a writ does not change what companies should be doing as they work toward this year’s filings.
As of today, the SEC’s existing guidance issued in April 2014, and implemented by the SEC’s May 2014 partial stay of the rule, remains in place. So, until otherwise advised by the SEC, companies should continue to look to the April 2014 SEC Statement for guidance.
What Are Companies Required to Disclose in Their Conflict Minerals Reports?
Companies must disclose information about their due diligence processes and procedures in their conflict minerals reports. And, as of today (according to the April 2014 SEC Guidance):
No company is required to describe its products as “DRC conflict free,” “having not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable”
If a company voluntarily elects to describe any of its products as “DRC conflict free” in its conflict minerals report, it must obtain an independent private sector audit (IPSA) on its due diligence
For products that are not described as “DRC conflict free,” companies must disclose smelters/refiners that processed the conflict minerals in those products, if they are known
For products that are not described as “DRC conflict free,” companies must disclose country of origin of the conflict minerals in those products, if they are known
For products that are not described as “DRC conflict free,” companies must disclose their efforts to determine the mine or location of origin of their conflict minerals
The transition period allowing companies to use the “DRC conflict undeterminable” descriptor has expired for most companies. (“Smaller reporting companies” have 2 more years to use this descriptor.) The SEC has stated informally that, for now, companies may still use this term notwithstanding the end of the transition period. But, of course, since the SEC has indicated that no specific descriptions are required, any labels or descriptors could be used in the filings.
But, there are nuances to the smelter/refiner, country of origin, and other disclosure requirements. So, companies are advised to seek guidance from experienced counsel on the specific requirements that apply to them.
The biggest question for this reporting year has been whether an IPSA is required and whether companies are volunteering to obtain IPSA’s even if not required. If the conflict minerals rule survives review by the district court and the SEC, it is likely that IPSA’s will ultimately be required for companies that file conflict minerals reports. That could change, of course, as a result of considerations by the district court and the SEC in light of the court of appeals’ decision. But, according to the existing guidance, for calendar year 2015 reports due in May of 2016, an IPSA is only required if a company chooses to describe a product as “DRC conflict free” in its conflict minerals report.
It seems almost inconceivable that the SEC would change the existing guidance for the calendar year 2015 reports due by May 2016. Such a change so close to the reporting deadline would be incredibly disruptive and costly, and it would, no doubt, be met by a legal challenge to delay implementation of any such changes.
What is the Next Procedural Step for the Conflict Minerals Rule?
The court of appeals’ decision itself remanded the case back to the district court “for further proceedings consistent with [the court of appeals’] opinion.” Those proceedings will consider whether the judgment about the First Amendment violation also applies to Section 1502 of Dodd-Frank or only to the SEC’s conflict minerals rule. And, if revision of the rule by the SEC is eventually required, that process itself would be rule-making. And, such a rule-making process could result in yet another legal challenge.
So, the initial legal challenge to the SEC’s 2012 conflict minerals rule is over. But, as the rule is remanded to the district court and then possibly to the SEC, more challenges are likely to follow. Nevertheless, because the EU is developing its own conflict minerals regulation, companies should not stop their investigations and review activities. Regardless of what happens to the SEC rule, supply chain transparency and detailed sourcing information about tin, tantalum, tungsten, and gold will be required of many companies going forward.