The U.S. Court of Appeals for the D.C. Circuit has denied an emergency motion by the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable to stay the Securities and Exchange Commission’s conflict minerals rule under the Dodd-Frank Act requiring companies to disclose their use of minerals such as tungsten and tin mined in war-torn areas of Africa like the Democratic Republic of the Congo.
Despite the industry groups’ efforts to delay implementation of the rule, the decision by the appeals court on Wednesday reinforces the originally mandated June 2, 2014 reporting deadline, consistent with new guidance issued by the SEC modifying the reporting requirements in accordance with the Court of Appeals’ ruling on April 14 (see SEC Partially Stays Conflict Mineral Rules).
Section 1502 of the Dodd-Frank Act, known as the “conflict minerals provision,” aims to break the links between the eastern Democratic Republic of the Congo’s vast mineral wealth and the armed groups that prey on and profit from the region’s mineral trade. The provision requires U.S.-listed companies that use tin, tantalum, tungsten or gold to conduct due diligence on their supply chains and determine if their purchases fund armed groups in the DRC or an adjoining country. Section 1502 has already changed the way that many companies scrutinize their supply chains and has catalyzed important reforms in the eastern DRC and neighboring countries.
The Court of Appeals’ initial ruling, issued on April 14, 2014, upheld the majority of the SEC’s rule to implement Section 1502. The court narrowly ruled that the regulation’s requirement for companies to describe products as not been found to be DRC conflict free’ is a violation of the First Amendment’s right to free speech by compelling specific corporate speech. This decision may be subject to further review by the entire Court of Appeals. However, the court’s ruling upheld the law’s other disclosure requirements, which were not challenged by the industry groups and which can move forward without companies having to describe their products as DRC conflict free or not.
“They’re not issuing an emergency stay, so that lets the SEC’s revised version of the rule go forward where companies will have to report by June 2,” said Frank Murray, senior counsel at the law firm Foley & Lardner, who advises business clients on supply chain management issues, including compliance with conflict minerals disclosure requirements and establishing procedures and policies to detect and avoid counterfeit parts. Murray is also a member of the National Association of Manufacturers’ Conflict Minerals Task Force, as well as NAM’s Critical Minerals and Rare Earth Task Force. “In some ways NAM was appealing to them, saying, Your decision was really important, and it gutted the rule and really needs to be reconfigured, and what the SEC is doing is not really consistent with that decision, and we need to have a stay so they can re-examine it.’ And they didn’t take up that invitation and are letting things go forward,” he said in an interview Thursday.
Murray sees several possibilities with the decision. “On one hand, it could be just a very narrow decision reflecting their conclusion that what NAM was asking for was an emergency form of relief that they didn’t meet the legal standard for, but it could also reflect the court somewhat agreeing with the SEC that the scope of their First Amendment ruling was very limited and what the SEC was doing was in harmony with that.”
Murray noted that the SEC has the option to ask for a rehearing en banc to see whether the First Amendment ruling would really stand or if it would get overturned. “If they don’t take that route and the fact that they won on most of the issues—the Administrative Procedure Act and the Exchange Act issues—and just go forward with this continued view that it was really just about the magic words of not conflict free,’ but otherwise leave the rule in place, then I think the next battleground will be at the district court where it’s been remanded for proceedings consistent with the early circuit court decision,” he said. “That would probably be where NAM would raise the issue again with the district court, that based on this ruling, it really goes to the essential basis of the rule and the SEC needs to take another look at this and do a new rule with notice and comment rulemaking that fashions a rule that makes sense when you can’t say someone is not conflict free.”
He believes companies will now have to file their first conflict mineral reports by June 2, even though they don’t have any experience with preparing such a thing. “That will be a learning experience for companies since this is the first time they’re going through this drill, and that’s why there’s been a lot of angst about the maneuverings in the court about whether the stay would be issued or not,” he said. “There’s a lot of uncertainty about what these reports should look like and what everyone else was doing, and what the expectations of the socially active groups that are sort of instigating the conflict mineral disclosures are going to be. I think people were kind of hoping for a reprieve that if the rule was going to change, they would be spared this initial filing. That’s not going to happen, so the only issue that remains is whether the rule will be reconfigured down the line based on the First Amendment decision.”
One of the advocacy groups supporting the conflict mineral reporting is Global Witness, and it praised the latest court decision.
“We are very encouraged by the court’s decision to keep the filing deadline for the conflict minerals provision in place based on the fact that the Court of Appeals upheld the vast majority of the SEC rule for Section 1502,” said Corinna Gilfillan, the head of Global Witness’s U.S. office, in a statement. “The First Amendment should not be used as an excuse to hide information that Congress has decided matters to regulators, consumers and investors. Public disclosures are an important means of informing regulators, investors and consumers about what companies are doing to source their minerals responsibly from the Great Lakes region. ”
Global Witness is urging the SEC to seek further review of the ruling on the First Amendment question by the entire Court of Appeals to protect consumers’ and investors’ right to information and to hold companies accountable to their stakeholders. The group said the SEC should also publicly commit to uphold the original intent of the law, which requires independent private sector audits for all companies, and should reinstate this requirement, as it is inconsistent with the statute for the audit requirement to be removed altogether, regardless of whether the court’s First Amendment ruling stands. Companies can comply with the audit requirement without describing the conflict free status of their products, the group pointed out, and Congress has made clear that independent third-party audits are important to guarantee the credibility of company due diligence reporting. With the June 2 reporting deadline now two weeks away, Global Witness is calling on companies to fully comply with Section 1502 and submit comprehensive reports that are audited. The group said it plans to monitor the substance and quality of the reports to assess the extent of company efforts to source minerals responsibly.
Several investor groups also applauded the appeals court decision, including Boston Common Asset Management, Calvert Investments, Domini Social Investments, Everence, Interfaith Center on Corporate Responsibility, Responsible Sourcing Network, Trillium Asset Management, US SIF: The Forum for Sustainable and Responsible Investment, and Walden Asset Management.
In a group statement, they said Friday, “Many companies, including those with complex global supply chains, have demonstrated the willingness and ability to comply with the rule by conducting due diligence and preparing disclosures. The SEC has made clear that it expects companies to file reports by the June 2 deadline, and yesterday’s court decision eliminates any remaining uncertainty about issuers’ obligations under the rule. As this deadline approaches, investors commend the significant efforts that many companies have already made and look forward to reviewing the first reports. The first set of reports will provide an initial baseline of information from companies as their due diligence efforts become part of their regular business operations. This information will inform investment decisions by taking into account companies’ accurate disclosure and effective mitigation of material risks.
“While we applaud yesterday’s decision, we also remain concerned by the decision that the court issued on April 14,” the investor groups added. “That decision preserved the SEC rule’s due diligence and reporting provisions, but invalidated on First Amendment grounds the rule’s requirement that companies designate whether products are conflict-free.’ Broad application of the court’s approach to First Amendment protections against compelled speech could threaten the ability of Congress to require corporate disclosure of information that is material both to investors and to the public interest. Effective implementation of the rule will not only benefit investors, but also will enable companies to conduct business responsibly in what continues to be a volatile region. Most importantly, it will benefit the people of the Democratic Republic of the Congo and the Great Lakes Region by curtailing the use of the mineral trade to perpetuate a nearly two-decade-long conflict.”
Murray sees further legal maneuvering ahead as the various parties continue to battle over the conflict minerals rule. “I think the interesting point is that if it does go back to the district court, if the SEC doesn’t challenge the First Amendment ruling any further, it’s going back to presumably the district court that rejected the First Amendment argument in the initial pleading, so I’m not overly optimistic that the district court is going to take an expansive view of the First Amendment issues,” he said. “But again if they take a very limited view, NAM presumably could appeal that back to the circuit court and say, Hey, they’re still not complying with your decision correctly.’ So I don’t think we’ve seen the end of the challenges or the questions about the ruling. But in a lot of ways I think when the ruling by the D.C Circuit first got issued, people in industry were somewhat optimistic that it would have a significant impact on the rule. There’s less and less cause for optimism as things go forward that the rule will end up changing dramatically.”