Until the court issues a stay or the SEC clarifies its expectations for filers, companies should comply with May 31 deadline
Less than two months before the first reporting deadline, a federal appeals court ruling on April 14 has thrown into question how enforceable the conflict minerals rule is. But public companies sweating over preparation of their Form SD filings shouldn’t relax just yet, as the full implications of the decision remain uncertain.
From the start, business groups such as the National Association of Manufacturers (NAM) have opposed the rule, which Congress directed the SEC to create in 2010 when it passed the Dodd-Frank Act. The rule requires companies to determine if their products contain any of the 3TG minerals (tin, tungsten, tantalite and gold) commonly extracted from the Democratic Republic of Congo (DRC) and neighboring countries, and then report their findings to the SEC. It’s the last requirement, however, that the appellate court has found fault with: that companies label the affected products as conflict-free or not, depending on the source of the 3TG minerals. Issuers would have had to use those labels in their reports to the SEC and on their websites.
After the SEC finalized the rule, the NAM, US Chamber of Commerce and the Business Roundtable sued to block its implementation. The SEC won at the trial level, and the US Court of Appeals for the DC Circuit ruled this week that the trial court got it mostly right.
However, the DC Circuit said that forcing companies to label products ‘not been found to be DRC conflict free' compelled speech in violation of companies’ first amendment rights. Rather than a factual statement needed to avoid deceiving consumers or investors, explained the court, the label was tantamount to telling the world the company had blood on its hands. Thus the part of the rule requiring companies to identify their products as such in a report to the SEC or on their websites was unconstitutional.
In a joint statement issued after the April 14 ruling, the US Chamber of Commerce, NAM, and Business Round Table said, ‘We are still reviewing the opinion, but we are pleased with the DC Circuit's decision in NAM, Chamber of Commerce, and BRT v. US Securities and Exchange Commission finding the statute and regulation are unconstitutional. We understand the seriousness of the humanitarian situation in the Democratic Republic of Congo (DRC) and abhor the violence in that country, but this rule was not the appropriate way to address this problem.’
Despite their statement, it’s not clear the entire rule has been invalidated; just that a part of it has been. Given that the rule requires companies to file detailed reports about the sourcing of their 3TG minerals by May 31 (really June 2, since May 31 is a Saturday), what is a company to do?
‘There’s a lot of uncertainty,’ says Joseph Hall, partner with Davis Polk & Wardell. ‘I would not stop working on my Form SD at this stage.’ Companies will get more clarity ‘if either the district or circuit court issues a stay of the rule in whole or in part. If the court doesn’t do either, I would look to the SEC to explain its expectations for filers.’
Unfortunately, for now all the SEC will say is that ‘it is reviewing the decision,’ according to SEC spokeswoman Christina D’Amico.
Ultimately, Hall says, issuers should not take too much comfort from the opinion because it ‘gives a road map to the SEC for how it can issue a rule that will withstand a First Amendment challenge. [For example,] the SEC could say the first thing is to determine whether any of your 3TG minerals were sourced in or near the DRC, and then to determine if they directly or indirectly financed armed conflict. If that’s true for any of your products, I think the ruling is saying that you cannot be compelled to label your products as not DRC conflict free, but the SEC could tell you to describe in your own words what you learned about the contents of your products.’
The compelled speech issue is pretty narrow, he adds. ‘The securities laws compel and inhibit all kinds of speech; this decision doesn’t call into question the SEC’s ability to regulate speech.’
At issue is a very specific kind of heavily freighted speech. For example, Hall suggests, ‘what if every company had to issue a report characterizing the carbon footprint of every product, and products with a carbon footprint above x have to be reported to the SEC under the label climate changing products? I think the court is uncomfortable with compelling that kind of speech.’
Even if the rule were ultimately invalidated as a result of further appeal, he notes, ‘unless Congress repeals the relevant portion of the Dodd-Frank Act, the SEC will remain under an obligation to pass some rule that requires disclosure regarding conflict minerals.’
