Despite an appellate court opinion that struck down a disclosure requirement in the SEC’s new conflict minerals rule, experts say companies need to continue tracing the origins of the gold, tantalum, tin, and tungsten in their supply chains and preparing to file their disclosures.
The SEC’s conflict minerals rule was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203.
The rule requires U.S. public companies to make an effort to determine and disclose whether the gold, tin, tantalum, and tungsten in the products they manufacture originated in mines run by warlords in the Democratic Republic of the Congo (DRC) or its neighboring countries.
A legal challenge by business groups resulted in an appellate court opinion earlier this week that struck down part of the rule. Although most features of the rule survived the court challenge, the U.S. Court of Appeals for the District of Columbia Circuit decided Monday that by compelling an issuer to “confess blood on its hands,” the disclosure requirements in the SEC’s final rule interfere with the exercise of freedom of speech under the First Amendment.
Specifically, the appeals court agreed with the business groups that requiring companies to disclose whether their products are “DRC conflict free” unconstitutionally compels companies to criticize their own products. But most of the rule remained intact.
“The opinion says essentially that requiring companies to publicly state whether their products are ‘conflict free’ violates their free speech rights,” said Obi Madubuko, a lawyer and co-chair of the Foreign Corrupt Practices Act & International Anti-Corruption Group at the law firm McDermott Will & Emery. “But it upheld the SEC’s requirement that public companies still have to undergo the analysis to find out if so-called conflict minerals are present in their product lines, even if in just small amounts.”
Further litigation is pending, and the SEC has not yet publicly responded to the court’s opinion as the May 31 deadline for companies to file conflict minerals disclosures with the SEC approaches. Chris McClure, CPA/CFF, a director in Crowe Horwath’s forensic services group, said companies are continuing along their current compliance path while awaiting more clarity about the path the courts will take and how the SEC will respond.
“The work continues, where companies are continuing to get information from their suppliers, continuing to refine and validate that information, and continuing to minimize risk in their supply chains,” McClure said.
An SEC representative said the commission is reviewing the court decision.
Compliance experts will be watching carefully. Many large companies have spent years and significant resources building systems to enable compliance with the conflict minerals statutes. Those that have completed the research into their supply chains will be waiting to see what effect the appellate court ruling has on the disclosure requirements.
“There are a lot of companies that are advanced in terms of what is coming down the pipeline,” Madubuko said. “And now that they’ve either gotten the results back from their efforts—or for those companies that are just beginning to look into this area and are seeking to comply with the rules—they are all wondering, what is it that they need to file with the SEC and keep posted on their website.”
Other companies are playing catch-up because they delayed their compliance work in 2013 in hopes the courts would overturn the conflict minerals requirements, McClure said. He said companies should continue working toward compliance with the rule, as the May 31 deadline approaches.
Some companies are likely to push forward with plans to become conflict-free regardless of the fate of the SEC rule. Companies such as Apple, HP, and Intel have announced that they plan to engage in conflict-free sourcing in the future.
Suppliers of companies that seek conflict-free sourcing will be affected by those plans.
“Those are market-driven initiatives by some of the leading companies to be conflict-free,” McClure said. “So I suspect that those will continue regardless of what the SEC says.”
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.