The US Court of Appeals for the District of Columbia Circuit in April 2014 upheld the bulk of the Security and Exchange Commission’s then-new Conflict Minerals Rule, but ruled a key disclosure requirement violated the First Amendment because it forced a company to “confess blood on its hands.”
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The same federal appeals court ruled against the disclosure requirement a second time Tuesday, saying an investigation requirement is fine, but disclosing that material remains untracked does not require an admission tantamount to guilt, when it comes to receiving raw materials from war-torn areas.
Disclosure of Unknown Origin
The Dodd-Frank Wall Street Reform and Consumer Protection Act required companies to disclose whether any tin, tantalum, tungsten or gold (commonly known as 3TG), in their supply chains is connected to violent militia groups in Africa.
An SEC spokesman said the commission is reviewing Tuesday’s decision.
The three-judge appeals panel split 2-1, effectively siding with business groups in ruling that forcing companies to designate which products “could not be found to be ‘DRC conflict free’” is tantamount to requiring firms to criticize their own products.
Two judges appointed by Republican presidents voted in the majority and a recent appointee of President Barack Obama dissented.
Conflict Minerals Rule Still Intact
The court’s rulings did not overturn the entire Conflict Minerals Rule, it actually upheld requirements such as having companies investigate whether their products include the minerals and a requirement to file public reports on their investigations, a process that began last year.
One situation where a respondent could not confirm that all of its raw materials were DRC conflict free, was party supply retailer Party City, a company that filled out a conflict minerals compliance form and asked their suppliers where, exactly, all of the materials for their mylar balloons and other party supplies came from. Party City reported it received little response from its supply chain.
That was one of many cases that highlighted the difficulty of actually vetting and confirming supply chain compliance for the wide range of businesses that the Conflict Minerals Rule covers.
What Does This Mean For Conflict Minerals Compliance?
In a statement after the initial ruling against the SEC last April, the regulator indicated that companies are not required to identify products as “DRC conflict free,” having “not been found to be ‘DRC conflict free’” or “DRC conflict undeterminable.” The SEC also indicated that, pending further action, an independent private sector audit (“IPSA”) will not be required unless a company voluntarily elects to describe its own product as “DRC conflict free” in its Conflict Minerals Report. That statement is likely to remain in effect pending the outcome of further litigation. It also looks unlikely that the private sector audits will be required this year and, barring a legal settlement, likely most of next year.
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The SEC can petition the entire DC Circuit Appeals Court to hear the case en banc, a request that the court can decide whether or not to grant. The SEC can also appeal to the US Supreme Court no matter what the outcome is at the circuit court level. The business groups that challenged the Conflict Minerals Rule can ask the court to stay the entire law, as they did after the April decision, but it’s not likely that the court would grant such a request as a stay was not allowed after the initial decision.
Most larger companies — in a variety of industries — intend to continue implementing their 3TG traceability and responsible sourcing initiatives no matter what the outcome of the case concerning the DRC measure.