Corporate Communicator - Summer 2014


Letter from the Editor

Dear clients and friends,

In this issue of the Corporate Communicator, we bring you an article about recent developments concerning the Conflict Minerals Rules litigation. We hope you have a great summer. 

Very truly yours,
Snell & Wilmer
Corporate and Securities Group

Conflict Mineral Rules Litigation Continues

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) added Section 13(p) to the Securities Exchange Act of 1934, as amended (the Exchange Act), mandating that the SEC adopt regulations relating to “conflict minerals.” On December 15, 2010, the SEC proposed regulations to implement Section 1502 and on August 22, 2012, the SEC adopted final rules (the Conflict Mineral Rules). Conflict minerals include columbite-tantalite (coltan), cassiterite, gold, wolframite or their derivatives: tantalum, tin and tungsten.

Briefly summarized, the Conflict Mineral Rules require public reporting companies to determine whether any conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company. This is referred to as Step 1. If not, no further inquiry or reporting is required. But, if so, the company is required to file a Specialized Disclosure Report on Form SD, the first of which was due no later than June 2, 2014, relating to conflict minerals used by the company in the prior calendar year. 

For companies required to file a Form SD (based on the results of Step 1), the company must first conduct a reasonable country of origin inquiry (RCOI) to determine if its necessary conflict minerals originated in the Democratic Republic of the Congo or adjoining countries[1] (the Covered Countries) or are from recycled or scrap sources. If, based on the RCOI, the company determines that any of its necessary conflict minerals originated in the Covered Countries and are not from recycled or scrap sources, or the company has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not be from recycled or scrap sources, it must exercise due diligence on the source and chain of custody of its conflict minerals and file a conflict minerals report as an exhibit to the Form SD. Companies required to file a conflict minerals report must include an independent private sector audit with the conflict minerals report.[2] However, for a transition period of two years for all registrants and four years for smaller reporting companies, the audit is not required for products that have been determined to be DRC conflict undeterminable. This category applies to products that the registrant has not been able to determine are “DRC conflict free” after exercising required due diligence. A product is DRC conflict free if it does not contain necessary conflict minerals that directly or indirectly finance or benefit armed groups in the Covered Countries. After the transition period, if a registrant has not been able to affirmatively determine that its conflict minerals are DRC conflict free, it must describe those minerals as “having not been found to be ‘DRC conflict free.’”

The National Association of Manufacturers, Chamber of Commerce of the United States of America, and Business Roundtable challenged the Conflict Minerals Rules in court, raising Administrative Procedure Act (APA), Exchange Act and First Amendment claims. In a ruling made on July 23, 2013, the United States District Court for the District of Columbia ruled that the Conflict Mineral Rules satisfied the requirements of the APA and the Exchange Act. The Court also held that the Conflict Mineral rules passed muster under the analytic framework for the First Amendment claims, even under the “intermediate scrutiny” standard set out in Central Hudson Gas & Electric Corp. v. Public Service Commission, 447 U.S. 557 (1980). This lower court decision was appealed to the United States Court of Appeals for the District of Columbia Circuit, which ruled on the matter on April 14, 2014. The Appeals Court affirmed the lower court decision on the APA and Exchange Act claims, but reversed on the First Amendment claims.

The central issue for the First Amendment analysis is the applicable standard of review. The SEC had argued that rational basis review was appropriate under Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985). The Appeals Court noted, however, that under Zauderer, rational basis was the appropriate standard only as to disclosures of purely factual and uncontroversial information and where the disclosure requirements are reasonably related to the State’s interest in preventing deception of consumers. The Appeals Court pointed out that the Conflict Minerals Rules were not enacted for the purpose of preventing deception. Nor is it clear that the information required is purely factual and uncontroversial. In this regard, the Court mused that:

The label “conflict free” is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that “message” through “silence.” [citation omitted] By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.

The Appeals Court also disagreed that rational basis was the appropriate standard for rules regulating the securities industry under SEC v. Wall Street Publishing Institute, Inc., 851 F.2d 365 (D.C. Cir. 1988). In Wall Street, the injunction at issue regulated inherently misleading speech, used to sell securities. In the case of the Conflict Minerals Rules, consumer deception is not the issue and the “conflict free” label is not used to sell securities.

The Appeals Court then ruled that is was not necessary to decide whether to use strict scrutiny or the intermediate standard set out in the Central Hudson test for commercial speech, because the Conflict Mineral Rules do not survive even the intermediate standard. Under Central Hudson, the government must show a substantial government interest that is: (1) directly and materially advanced by the restriction; and (2) that the restriction is narrowly tailored. In the Conflict Minerals Rules case, the government had not presented evidence that less restrictive measures would fail and, without such evidence, the Appeals Court could not say that the restriction was narrowly tailored. In response to an SEC argument that issuers can explain the meaning of “conflict free” in their filings in their own terms and thus, the impact of the Rules on issuers is minimal, the Appeals Court held that the right to explain compelled speech is not adequate to cure a First Amendment violation. 

The Court thus held that the Conflict Minerals Rules violated the First Amendment to the extent that they require entities to state that any of their products have “not been found to be ‘DRC conflict free.’” Following this decision, the SEC issued an order confirming that the Form SDs would still have to be filed by the deadline of June 2, 2014, and all necessary disclosures would still be required, but issuers would not be required to actually label their products as DRC conflict free or DRC conflict undeterminable. 

On May 29, 2014, the SEC filed a petition for rehearing en banc with the Appeals Court pending its decision in the case of American Meat Institute v. United States Department of Agriculture, No. 13-5281. The SEC noted that the Appeals Court had granted en banc rehearing in the American Meat case to consider whether rational basis review can apply to compelled speech that serves interests other that preventing consumer deception, a matter directly on point to the decision of the Appeals Court in the Conflict Minerals case. Oral argument in the American Meat case was held on May 19, 2014 and the Court’s decision is pending. 

Because it is difficult to predict the ultimate outcome of the Conflict Minerals Rules case, including the en banc hearing aspect as well as what changes to the Conflict Minerals Rules might result, issuers should continue to monitor case developments, SEC interpretations and SEC rulemaking actions in this area. For now, the Conflict Minerals Rules remain mostly in effect and issuers should consider continuing with their due diligence efforts for calendar year 2014 (for which the second conflict minerals report will be due by June 1, 2015). Issuers should also consider reviewing examples of the first Form SDs that were recently filed, particularly those filings by industry peers. 


[1] Currently: Angola, Burundi, Central African Republic, The Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia.

[2] The audit report must express an opinion or conclusion as to whether the design of the company’s due diligence framework as set forth in the conflict minerals report is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the company, and whether the company’s description of the due diligence measures it performed as set forth in the conflict minerals report is consistent with the due diligence process that the company undertook.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Snell & Wilmer | Attorney Advertising

Written by:


Snell & Wilmer on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:

Sign up to create your digest using LinkedIn*

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Already signed up? Log in here

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.