U.S. Appeals Court Strikes Down Part of SEC Conflict Minerals Rules, Upholds Key Parts

On April 14, 2014, the United States Court of Appeals for the District of Columbia Circuit issued its ruling in the challenge to the SEC’s conflict minerals rules. The court struck down the requirement that an issuer describe its products as not “DRC conflict free” because it violates the First Amendment by compelling speech by the issuer. However, the Court upheld other key parts of the conflict minerals rules, including without limitation the lack of a de minimis exception, the country of origin due diligence requirement and the extension of the rules to issuers that “contract to manufacture” products.

The court concluded that compelling an issuer to describe their products as not “DRC conflict free,” is not narrowly tailored and, therefore, would not survive an immediate scrutiny review (although the court declined to state whether strict or immediate scrutiny would apply). However, the court did suggest that it would be permissible for the SEC to require an issuer to describe the conflict minerals status of its products using the issuer’s own language rather than the specific language required by the statute or the rules.

The court posits that the SEC could then compile that information in a centralized list for investors and consumers to view. Although none of this was part of the court’s order, it is illustrative of what the court views as a constitutionally permissible disclosure regime.

It is not clear how the SEC will react to the court’s decision. Some observers believe that the SEC will delay the upcoming June 2, 2014 filing deadline for the first Form SD. However, absent action from the SEC, issuers will still be required to comply with the other conflict minerals rules requirements, including examining their supply chain for conflict minerals, making a reasonable country of origin inquiry, determining if their conflict minerals finance armed groups and filing a Form SD regarding the foregoing.

These are substantial undertakings, and until the SEC says differently, it is advisable for issuers to continue their compliance efforts as though the Form SD deadline will remain June 2, 2014.