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SEC Issues New Guidance on Conflict Mineral Rule, But Rule’s Future Is Unclear

Following a U.S. Court of Appeal ruling in National Association of Manufacturers, et al. v. SEC, et al., No. 13-5252 (D.C. Cir. April 14, 2014), the Securities and Exchange Commission issued new guidance on compliance with the Conflicts Mineral Rule.  In the litigation, the National Association of Manufacturers and other business groups challenged the rule on First Amendment and other grounds. On appeal, the court struck down several, but not all, of the Conflict Mineral Rule requirements. Accordingly, at this time companies subject to the Rule do not have to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free’.  However, a petition for rehearing filed by the SEC on May 29, 2014 may result in yet another change in the Rule’s application.

The appellate ruling left the rest of the Rule’s requirements, including the June 2, 2014 deadline for submissions, intact. The SEC has received  Conflict Minerals Rule reports from a number of companies, including Apple, Intel and HP.

Under the SEC’s guidance intended to comport with the appellate court’s opinion,

No company is required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” If a company voluntarily elects to describe any of its products as “DRC conflict free” in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule. [Footnote omitted.] Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as “DRC conflict free” in its Conflict Minerals Report.

The SEC promulgated the Conflict Mineral Rule in 2012 as a regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Rule’s goal is to end the violent conflict in the Democratic Republic of the Congo, which is believed to be financed by the exploitation and trade of conflict minerals originating in the DRC. Conflict minerals include tantalum, tin, gold and tungsten.

Among other things, the Rule requires companies who use conflict minerals originating in the DRC or adjoining countries to report to the SEC the due diligence measures undertaken regarding the source of the conflict minerals and chain of custody. The Rule applies to companies that file reports with the SEC under the Securities Exchange Act and that use conflicts minerals necessary to the functionality or production of a product manufactured by those companies. The report must include a description of the products manufactured or contracted to be manufactured that are not “DRC conflict free,” the facilities used to process the conflict minerals, the country of origin of the conflict minerals and the efforts to determine the mine or location of origin. This information also must be made publicly available on the company’s website.

The National Association of Manufacturers and other plaintiffs challenged the Rule as arbitrary and capricious under the Administrative Procedure Act and as violating the First Amendment. After trial court denied the plaintiffs’ motion for summary judgment, they appealed — resulting in the appellate opinion that overturned certain aspects of the Rule on First Amendment grounds and led to the SEC’s new guidance.

In the meantime, the SEC filed a petition for rehearing on May 29, 2014, pending the resolution of another First Amendment/commercial speech appeal, American Meat Institute v. United States Department of Agriculture, Case No. 13-5281 (D.C. Cir.).  That appeal involves a challenge to the USDA’s point-of-origin labeling rules. The key issue in the American Meat Institute case that may affect the outcome of the SEC petition for rehearing is whether a lower “rational basis” standard applies to the court’s review of the agency rule.  Depending on the outcome of that case, the SEC may or may not proceed with its petition in the Conflicts Mineral Rule case — and the appellate opinion may or may not stand.

Ms. Grimaldi maintains a diverse environmental law practice focusing on chemical and product regulation and litigation defense. Her practice areas include Proposition 65, California's Safer Consumer Products Regulations, California's Rigid Plastic Packaging Container Act and the federal Toxic Substances Control Act. Ms. Grimaldi graduated from the University of California Hastings College of the Law magna cum laude and holds a Bachelor of Science Degree in Bacteriology from University of California, Davis. Prior to attending law school, she worked as a research assistant in laboratories at the University of California, San Francisco Cancer Research Institute and at the University of California, San Francisco School of Medicine.