On Monday, April 14, 2014, the U.S. Circuit Court of Appeals for the District of Columbia (the DC Circuit) struck down part of the federal rules requiring publicly traded companies to report on their use of “conflict minerals,” but let stand other reporting requirements in the rules. In particular, the opinion strikes down only the requirement that companies make a specific statement regarding whether they found their products contained minerals linked to armed conflict in central Africa on First Amendment grounds. The decision comes a mere six weeks before public companies are required to file their first reports on Form SD under the rules.
The limited decision creates some uncertainty regarding the content of the Form SD, which must be filed on May 31 (extended to June 2 this year because May 31 is a Saturday). The SEC has not immediately issued revised guidance addressing how the decision will affect the content of the Form SD. In addition, the D.C. Circuit is expected to hear another First Amendment law case, the outcome of which could further affect the conflict minerals disclosure obligation.
A three-judge panel of the D.C. Circuit focused on a requirement in the conflict minerals rules that requires companies to state in their annual reports that any particular product had “not been found to be ‘DRC conflict free.’” The court held that such a requirement to make a statement using specific language goes too far and violates companies’ First Amendment free speech rights.
The Dodd-Frank Act and the Securities and Exchange Commission’s rules require companies to report on whether they use certain minerals that are mined in parts of central Africa in and around the Democratic Republic of Congo and have been used to finance war and human rights abuses. The minerals are gold, cassiterite (tin), columbite-tantalite (tantalum), and wolframite (tungsten). The court did not invalidate rules requiring companies to examine their products and determine whether any minerals contributed to the war and human rights abuses in central Africa. It also did not invalidate the overall reporting requirements.
Companies will no longer, however, have to use the specific language in the SEC’s rules to state that their conflict minerals had “not been found to be ‘DRC conflict free’” in their conflict minerals report or on their website. The court relied in its opinion on the “compelled speech” doctrine of First Amendment law, which strongly disfavors government rules compelling private individuals or companies to speak and convey a certain message. The Court opined that “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”
Although it appears that the prescribed language is no longer required, the SEC rules still require certain reporting companies to file a Form SD and provide disclosure about their use of conflict minerals. A subset of those companies will also be required to describe the due diligence measures they have taken related to their conflict minerals, the standard they followed while doing so and an audit of their due diligence measures. Companies that must report under the new rule should proceed under the assumption that they must still file reports. SEC guidance over the next few days or weeks may address the SEC Staff’s view regarding how this decision will affect the content of the conflict minerals reports. For now, companies would be prudent to assume that they must still file a significant report by this year’s deadline.