D.C. Circuit Strikes Down Part of SEC's Conflict Minerals Rule (with Woody Comment)
On April 14, 2014 in National Association of Manufacturers v. SEC, the D.C. Circuit partially struck down the SEC's rule regarding Section 1502 of Dodd-Frank, which requires issuers to disclose whether their products contain "conflict minerals." Conflict minerals are defined in Dodd-Frank as four types of minerals mined from the Democratic Republic of Congo ("DRC") or one of its neighboring countries.
The SEC's rule requires that, if an issuer determines, after a reasonable country of origin inquiry and subsequent due diligence, that conflict minerals are present in its products, it must disclose that its products are "not DRC conflict free" in a report filed with the SEC. An issuer also must post the information on its corporate websites. However, in its ruling on Monday, the D.C. Circuit held that requiring issuers to describe their products as "not DRC conflict free" is compelled speech and therefore a violation of freedom of speech under the First Amendment. The Court held that requiring an issuer to label its products as "not DRC conflict free" is tantamount to requiring an issuer to "confess blood on its hands." The D.C. Circuit dismissed all other challenges to the rule, including to the lack of any de minimis exception in the SEC's rule and to the SEC's cost-benefit analysis.
Woody Comment: The D.C. Circuit's decision on the SEC's conflict minerals rule is the first rejection of an agency rule related to a Dodd-Frank provision on constitutional grounds. However, the three-member appellate panel did not strike down the SEC rule in its entirety; rather, the D.C. Circuit remanded the case to the district court for further proceedings. Thus, the Court's ruling affects only the SEC's rule and does not invalidate Section 1502 of Dodd-Frank. The Court acknowledged that the SEC was required by Dodd-Frank to promulgate a disclosure rule, and that the agency did not question the basic premise that a disclosure regime would help to promote peace and stability in the Congo, which is the stated aim of Section 1502. Nevertheless, the Court held that the rule's requisite description of "not DRC conflict free," which does not allow issuers to use their own language to describe their products, is a violation of the First Amendment.
Notably, the Court did not stay the May 31, 2014 filing deadline for Form SD, the conflict minerals disclosure form. Although it is likely that the SEC will provide guidance to issuers regarding compliance with the May 31, 2014 deadline in light of the D.C. Circuit's decision, issuers should continue to perform reasonable country of origin inquiries regarding manufactured products of theirs that could contain conflict minerals.
See: D.C. Circuit Opinion; Conflict Minerals Legislation: The SEC's New Role As Diplomatic and Humanitarian Watchdog (providing additional guidance on Dodd-Frank Section 1502); Business Fraud Advisor, June 2013 (additional guidance on Form SD and compliance with conflict minerals disclosure); Business Fraud Advisor August 2012; Form SD.