posted on 05.14.14

The SEC’s conflict minerals rule is on the rocks, with the D.C. Circuit Court and two sitting SEC commissioners questioning its viability. Meanwhile, the SEC, bolstered by several members of Congress, insists the June 2nd reporting deadline stands, creating uncertainty for manufacturers. A different First Amendment case on the court’s schedule this month might also influence the road ahead for compliance.

D.C. Circuit Court: The Rule Violates the First Amendment
On April 14th, the U.S. Court of Appeals for the District of Columbia held that at least a portion of the conflict minerals regulation—the part where companies must report and label products as “DRC conflict free” or not—violates the First Amendment as unconstitutionally compelled speech. It is clear from the court’s opinion that companies are now not required to label any of their products as “DRC conflict free,” “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” What is not clear is whether this flaw in the rule is severe enough, and permeates the rule enough, to warrant further action, including a possible delay in the reporting deadline or a delay, rewrite, or tossing of the entire rule.

The court did not delay the June 2nd reporting deadline and upheld most of the challenges to the rule, finding that the SEC acted reasonably in its decisions to:

• not include a de minimis exception;
• impose a due diligence requirement for all manufacturers;
• include issuers that “contract to manufacture” as subject to the rule; and
• establish a two-tiered transition period for products found to be “DRC conflict undeterminable.”

In an opinion that oscillated from robust disdain to mere inconvenience, the court found that the rule unconstitutionally compels speech in violation of the First Amendment by requiring companies to report and label their products as “DRC conflict free” or not. The swaying analysis the court followed to arrive at this conclusion, however, invites ambiguity about the ultimate outcome of the litigation and its impact on manufacturers.

For example, the court expressed disdain for the rule in a dramatic fashion, stating, “The label ‘conflict free’ is a metaphor that conveys moral responsibility for the Congo war [and] . . . requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups.” The court found that a company may disagree with this “assessment of its moral responsibility” and “may convey that ‘message’ through ‘silence.’” Thus, “[by] compelling an issue to confess blood on its hands, the statute interferes with that exercise of free speech under the First Amendment.”

The court’s concern later retreats from blood to labels when it ultimately finds a First Amendment violation only “to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be ‘DRC conflict free.’’” In short, the court concluded that the First Amendment violations can be resolved simply by eliminating the labeling requirement. This conclusion, however, is far from certain.

The SEC’s Official Response
The SEC issued a statement on April 29th reiterating its position that the reporting deadline of June 2nd remains in effect. The statement referenced the court’s finding that no company is now required to label its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” Further, the SEC advised that companies do not have to submit an independent private sector audit (IPSA) report unless the company chooses to describe its products as “DRC conflict free.”

SEC Chair, Mary Jo White, reinforced the SEC’s stalwart position on the reporting deadline during a congressional hearing on April 29.

Third-Party Responses
Twelve Democrats in Congress, led by Sen. Richard Durbin, sent a joint letter to White on April 21st, urging the SEC to continue its implementation of the rule. On April 28th, two sitting SEC commissioners, Daniel M. Gallagher and Michael S. Piwowar, issued a joint statement calling for a full stay of the rule given their belief that “the First Amendment concerns permeate all the required disclosures.”

The Lone (Form SD) Ranger
In the midst of the action, Siliconware Precision Industries became the first issuer to submit a Form SD and Conflict Minerals Report. The Taiwan-based company’s report is relatively straightforward, with a short description of its due diligence process following the OECD guidelines. Notably, the company states that some of its products are “DRC conflict free” while others are “DRC conflict undeterminable,” although the company did not submit an IPSA.

Looking Ahead
Manufacturers can expect that NAM will file motions to stay the entire rule with both the SEC and the Circuit Court. It’s all but a foregone conclusion that the SEC will deny the motion given its public posture. The Circuit Court, however, may be more receptive, even though they could have already issued a stay and chose not to.

On May 19th, the Circuit Court is set to hear another case, American Meat Institute vs. United States Department of Agriculture, on the First Amendment implications of government-required disclosures and what standard the court should use to review them. This is also a central question in the conflict minerals case and the court’s ruling could have a direct impact on it. In the conflict minerals case, Circuit Judge Srinivasan issued a concurring opinion saying his preference would have been to stay the First Amendment findings until after the American Meat case was decided. Thus, there is at least the possibility as well as a very good excuse (if the court feels it needs one) for the Circuit Court to stay the rule.

Update provided in partnership with the Manufacturers Alliance of Productivity and Innovation – by Rae Ann Johnson, General Counsel and Secretary