Court denies motion to stay SEC conflict minerals rule, disclosures required by June 2.

Last week, the saga of the U.S. Securities and Exchange Commission’s (SEC) conflict minerals disclosure rule took another turn as the U.S. Court of Appeals for the District of Columbia Circuit denied an emergency motion filed by industry groups to stay the rule. The rule, known as Exchange Act Rule 13p-1, was authorized by section 1502 of the Dodd-Frank Act and requires companies to make their first disclosures about their use of conflict minerals – such as gold, tantalum, tin, and tungsten from the Democratic Republic of Congo and adjacent countries – by June 2, 2014. The motion for stay was filed by three trade groups: the National Association of Manufacturers, the U.S. Chamber of Commerce, and the Business Roundtable.

We previously reported that in April, the D.C. Circuit Court of Appeals partially struck down the conflict minerals disclosure rule in National Association of Manufacturers v. Securities and Exchange Commission, finding that the rule’s requirement that companies describe whether their products have been found to be “DRC conflict free” constituted compelled commercial speech in violation of the First Amendment. Following that decision, the SEC released a statement on April 29 clarifying how companies should make disclosures under Rule 13p-1 while the court case continues. In that guidance, the SEC said companies need not use the phrase “DRC conflict free,” although companies could elect to do so as long as an independent private sector audit (IPSA) was conducted. Companies required by the rule to file a Conflict Minerals Report should describe “the due diligence that the company undertook.” In the case of products that cannot be determined to be DRC conflict-free, companies should disclose “the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.”

On May 2, the SEC itself issued a stay [PDF] applying to “those portions of [the rule] subject to the Court of Appeals’s constitutional holding… pending the completion of judicial review, at which point the stay will terminate.”

Following the Court’s denial of the motion for stay, companies must file their first Rule 13p-1 disclosures by June 2 in accordance with the SEC’s April 29 guidance. Yesterday, the Court held its en banc rehearing of oral arguments in a related case, American Meat Institute v. USDA, which the SEC has not sought to join.

D.C. Circuit Court partially strikes down SEC conflict minerals rule.

On Monday, a federal appeals court struck down a rule implementing the Dodd-Frank Act’s requirement that companies disclose whether their products contain conflict materials originating from the Democratic Republic of Congo (DRC), or adjoining countries. A divided (2-1) panel of the U.S. Court of Appeals for the D.C. Circuit ruled [PDF] that the U.S. Securities and Exchange Commission (SEC) rule compelled commercial speech in violation of the First Amendment.

Industry groups challenged the SEC’s final rule on Administrative Procedure Act (APA), Exchange Act, and First Amendment claims. In National Association of Manufacturers v. Securities and Exchange Commission, the industry groups appealed the District Court’s rejection of their claims, but only prevailed with respect to the First Amendment challenge.

The APA claim in part attacked the rule’s lack of a de minimis exception. As we reported in November, because the SEC rule does not contain a de minimis exception, the disclosure requirement – which also calls for due diligence and auditing – could apply to firms that use conflict minerals in very small amounts as catalysts in the manufacturing process. The Court upheld the decision not to include a de minimis exception, finding that the SEC, “relying on text, context, and policy concerns, inferred that Congress wanted the disclosure regime to work even for small uses,” and a de minimis exception would thwart the statute’s goals.

The Exchange Act challenge also failed, as the Court found that the SEC’s cost-benefit analyses as required by the Exchange Act were “reasonable,” even though the rule’s “compelling social benefits” were not quantifiable.

However, the Court sided with the industry groups with regard to the SEC rule’s requirement that companies describe its products as not “DRC conflict free” in reports filed with the Commission and on the companies’ own websites. Writing for the Court (and joined by Judge Sentelle), Judge Randolph found that rational basis review was not appropriate for this type of speech, because it only applies to “purely factual and uncontroversial information,” in cases in which “disclosure requirements are reasonably related to the State’s interest in preventing deception of consumers.” In this case, the SEC did not argue that the rule related to preventing consumer deception. Judge Randolph concluded that requiring the use of the “conflict free” label was found to convey a “moral responsibility for the Congo war,” tantamount to “compelling an issuer to confess blood on its hands” in interference with the First Amendment.

The Court further found that the SEC’s rule failed to meet the intermediate standard for commercial speech set out in Central Hudson, which “invalidates regulations for which narrower restrictions on expression would serve the government’s interest as well.” (Quotations omitted.) In this case, the SEC presented no evidence that less restrictive means would be ineffective, and the Court rejected its argument that the rule’s minimal impact was dispositive of the “narrowly tailored” requirement.

Notably, Judge Srinivasan declined to join the Court’s opinion with respect to the First Amendment claim, arguing that the issue should have been held in abeyance and part of the SEC rule stayed until the Circuit’s en banc re-hearing of a related case, American Meat Institute v. United States Department of Agriculture, regarding meat labeling.

Moving forward, the rule’s effective date for compliance is June 2, and the SEC has not yet offered a stay or guidance to companies on how to comply with the partially-invalidated rule. The SEC has also not yet announced whether it will seek to participate in the AMI case; otherwise, the case will be remanded to the D.C. District Court.

SEC defends its rule on conflict minerals, which may implicate catalysts.

In a recent court filing, the U.S. Securities and Exchange Commission (SEC) defended its decision not to provide a de minimis exception for uses of “conflict minerals” in its rules [PDF] implementing the Conflict Minerals Statutory Provision (Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act). The rules require companies to disclose whether designated “conflict minerals” in their products originated in the Democratic Republic of the Congo or nine adjoining countries, and could potentially affect manufacturers who use conflict minerals as catalysts or in a similar manner in another process.

Business groups which had previously sought a de minimis exception, including the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable, challenged the rule in a lawsuit filed last year in October. The groups argued that the SEC did not fully consider the rule’s economic consequences as required by the Exchange Act, and that a failure to define the term “derivative” could mean that metals in forms that are chemically distinct from the base metals subject to the rule would also subject manufacturers to the rule’s disclosure requirements. When SEC adopted its final version [PDF] of the rule in August 2013, it clarified the definition of conflict mineral—which includes “cassiterite, columbite-tantalite, gold, wolframite, and their derivatives”—to specify that the term “derivatives” are limited to the “3Ts” (tantalum, tin, and tungsten).

In the new version of the rule, the SEC declined to include a de minimis exception. Instead, manufacturers must consider only if the conflict minerals used “are necessary to the functionality or production of a product.” In its guidance, SEC clarified that only conflict minerals contained in the product would be considered “necessary.”  Because they are not typically contained in the final product, the rule does not generally cover conflict minerals used as a catalyst,. However, SEC noted in its guidance that if a catalyst made from conflict minerals is contained in the final product, even if only in de minimis amounts, then the conflict mineral is considered “necessary” to its production and is therefore subject to the final rule.

On October 23, the SEC defended its position in a filing in the U.S. Court of Appeals for the D.C. Circuit, having previously prevailed in the U.S. District Court for the District of Columbia. The SEC stated that “creating a categorical exception for small uses of conflict minerals would thwart” the purposes of the statute.  The SEC noted that conflict minerals are frequently used in small amounts and those uses could have “large cumulative effects.” On October 31, a dozen current and former Democratic members of Congress filed an amicus brief in support of the SEC. The case is pending before the D.C. Circuit; oral arguments have not yet been scheduled.