An appellate court Monday struck down part of the conflict-minerals rule, leaving SEC-reporting companies wondering what disclosures to include in their conflict minerals reports due on May 31.
The D.C. Circuit Court of Appeals said the requirement that companies attest that their products are “DRC conflict free” or “DRC conflict free undeterminable” to the Securities and Exchange Commission and on their websites violates their free speech rights.
Companies have been preparing their conflict minerals reports describing both the country of origin inquiry and supply-chain due diligence.
But with the appellate court’s ruling Monday, what can we expect the SEC and reporting companies to do?
“I think the SEC will clarify its expectations for compliance before the May 31 quarterly filing deadline,” according to Joseph Hall, a partner at Davis Polk in New York.
“Until the SEC issues such guidance, companies don’t need to bother saying ‘conflict free’ or ‘conflict free undeterminable’ in their disclosures, given the court’s ruling,” Hall said. “They should describe their reasonable country of inquiry and explain their supply-chain due diligence, as planned. But the labeling is no longer necessary.”
The SEC is not likely to propose new reporting standards before May 31. That would require a notice and comment period. But the agency could extend the deadline to the following quarter, Hall said.
Either way, issuers are left waiting for the agency’s guidance and the trial court’s final resolution, since the case was sent back to the district court.
If a company has to do a reasonable country of origin inquiry anyway, what’s wrong with the “DRC conflict free undeterminable” label?
“It forces you to describe your product in a way that is pejorative,” Hall said.
“The label saying that a product might not being free of conflict minerals requires the company to tell consumers that its products are ethically tainted, even when the company is unsure if their ingredients were used to finance armed militias.”
Michael Littenberg, head of the public companies practice at Schulte Roth & Zabel, and a widely published author on conflict minerals compliance, is also awaiting the SEC’s guidance. Until the SEC says more, he’s advising clients to continue moving forward with their compliance efforts.
“Irrespective of the status of the rule, there will continue to be pressure from many quarters to source these minerals responsibly,” he said, alluding to corporate and consumer interests that have rallied behind the effort to avoid trade in 3TG — gold, tantalum, tin and tungsten — from the Democratic Republic of the Congo.
“This will result in large portions of the supply chain continuing to implement many of the same compliance procedures contemplated by the rule, even if it is ultimately stayed or invalidated,” Littenberg added.
Julie DiMauro is the executive editor of the FCPA Blog and can be reached here.