Thursday, June 26, 2014
June 2014 Newsletter: Executive-in-Residence News: Butzel Long: "Conflict Minerals Update: Court says SEC cannot compel a company to 'confess blood on its hands' but upholds most of conflict minerals rule"
On May 14, 2014 the U.S. Court of Appeals for the District of Columbia Circuit denied an emergency request to delay the June 2 filing deadline for conflict minerals disclosures. This decision follows the same Court’s earlier decision striking down part of the U.S. Securities and Exchange Commission’s (“SEC”) Conflict Minerals Rule in National Association of Manufacturers, et al. v. SEC, et al., No. 13-5252 (D.C. Cir. April 14, 2014). The Court held that the SEC Reporting Rule would compel a public company to “confess blood on its hands” and, thus, interfere with that company’s exercise of its First Amendment right of free speech. Without the delay, public companies will be required to disclose information on their diligence process in a Conflict Minerals Report on Form SD.
On August 22, 2012, the SEC issued the final Conflict Minerals Reporting Rule (“Rule”) under Section 1502 of the Dodd-Frank Act seeking to deter companies from using conflict minerals purchased in the Democratic Republic of the Congo (“DRC”) and surrounding areas. Conflict minerals are: (i) columbite-tantalite (coltan/tantalum), (ii) cassiterite (tin), (iii) gold, (iv) wolframite (tungsten), and (v) any of their derivatives, which may be used to fund conflict and extreme violence in the DRC. Under the Rule, businesses that file reports with the SEC and which use conflict minerals that are “necessary to the functionality of production of a product manufactured by such person” must comply with the new Rules and file a disclosure report on Form SD.
The Court Upholds Most of the Rule
On October 19, 2012, the National Association of Manufacturers (“NAM”) and the U.S. Chamber of Commerce petitioned the U.S. Court of Appeals to review the Rule, requesting that the Court either modify or set them aside. NAM and the Chamber argued that the Rule creates an “unworkable, overly broad and burdensome system that will undermine jobs and growth” that “may not achieve Congress’s overall objectives.” The Court upheld most of the Rule including:
- De Minimus Exception: The Court determined that failure to include a de minimus exception would have a significant impact in the final Rule and that the failure to include such an exception was within the agency’s authority.
- Due Diligence Threshold: The Court acknowledged that the SEC established an “expansive rule” that was within its authority to create details for due diligence requirements.
- Phase-in Timeframes: Although the parties argued that larger manufacturers would be required to report within 2 years while their smaller suppliers are granted a 4 year phase-in period, the Court did not find this difference inconsistent or arbitrary as all reporters will face the same challenge.
Compelling a Company to Declare Products as “Conflict Free / Not Free” Is Unconstitutional
The plaintiffs challenged the Rule’s requirement that two statements be made: (1) a statement to the SEC that products are DRC conflict free, not conflict free, or undetermined and (2) a statement targeted to the public on a reporting company’s website. The Court evaluated these two required statements under the First Amendment and applied the traditional rules for commercial speech (i.e. the Central Hudson test that requires the government to have a substantial interest that is directly and materially advanced by the regulations/rules that is narrowly tailored to serve that interest). The Court concluded that the Rule was not narrowly tailored, and therefore violated the First Amendment by requiring public companies “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.’”
SEC Staff Offers Guidance
Following the Court’s decision, on April 29, 2014, the SEC issued a clarification of its Rule to avoid the potential First Amendment issues. Noting that the Court found no “First Amendment objection to any other aspect of the Conflict Minerals Report or required disclosures,” the SEC established that companies would only have to meet some of the reporting requirements. Most notably, companies are not required to declare whether their products contain or do not contain conflict minerals. Specifically:
- Companies that do not file a Conflict Mineral Report should disclose their reasonable country of origin inquiry(RCOI) and briefly describe the inquiry that was performed.
- Companies that do file a Form SD, the Conflict Mineral Report should include a description of the due diligence that the company undertook.
- A company would not have to identify its products as “DRC Conflict Undeterminable” or “Not Found to be DRC Conflict Free,” but should disclose for those products the facilities producing the conflict minerals, the country of origin of the minerals and the efforts undertaken to determine the mine or location of origin.
Adding to its clarification, on May 2, 2014, the SEC issued a partial stay of the disclosure aspect of the Rule pending further judicial review. The partial stay mirrored the SEC’s position that a conclusion of “DRC Conflict Undeterminable” or “Not Found to be DRC Conflict Free” is not required. The stay, however, requires public companies to document in the Form SD and Conflict Minerals Report all evidence and procedures used to make such a determination.
How Should Companies Respond?
The ongoing complexity of compliance and implementation will continue to impact public and private companies, both financially and in their relationships with customers and suppliers.
With the denial of the emergency request for delay, public companies must file their Form SD no later than June 2, 2014. This report must contain information regarding the due diligence efforts undertaken by the company, including the reasonable country of origin inquiry efforts to determine the mine location. It is important for a company to note that, although the April Court decision establishes that the SEC may not compel a company to declare its status, the disclosure requirements of the due diligence process may provide a roadmap to achieving the same information.
Suppliers to public companies must also continue to assess their diligence as a key part of the supply chain. Many companies, public and non-public alike, have modified their terms and conditions to specifically include a cascaded conflict mineral disclosure requirement. Providing information and properly integrating the downstream supply chain will be critical to successful reporting.
For more information about conflict minerals, please contact your Butzel Long attorney or the author of this Client Alert.
Jennifer A. Dukarski
734 213 3427
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