Conflict Minerals Rule Partially Struck Down By Federal Appellate Court

The U.S. Court of Appeals for the District of Columbia Circuit issued an opinion yesterday reversing, on First Amendment grounds, the portion of the Securities and Exchange Commission's conflict minerals rule requiring companies to disclose to the SEC and on their websites their products that are not found to be "DRC conflict free." However, the court upheld the remainder of the rule, including the requirement to conduct country of origin inquiries and due diligence as well as the lack of a de minimis exception for reporting under the rule.

The conflict minerals rule was adopted by the SEC in 2012 in response to a directive contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It requires public companies to analyze, starting with calendar year 2013, whether any products they manufacture or contract to manufacture contain "conflict minerals," defined currently as tantalum, tin, tungsten and gold, that are necessary to the functionality or production of those products. Issuers must then conduct a reasonable country of origin inquiry to determine whether the conflict minerals originated in the Democratic Republic of the Congo or its adjoining countries and must file a newly created "Form SD" with the SEC disclosing those results. With some limited exceptions, those who know or have reason to believe minerals necessary to their products were sourced from those regions must undertake extensive chain of custody due diligence to determine the minerals' source and prepare an additional report that must be independently audited and filed with the SEC. For any products that have not been determined to be "DRC conflict free," that is, the conflict minerals within the products did not directly or indirectly finance or benefit armed groups in the covered countries, issuers must provide a description of the product and other details related to the source of the minerals. During the first two years of reporting, the rule also provides relief for issuers who have not been able to ascertain the source of the minerals to be able to report a "conflicts undeterminable" status.

It is important to note that yesterday's decision did not vacate the conflict minerals rule in its entirety, nor did it issue a stay on its implementation. However, because the decision strikes down a key element to the required disclosure the ultimate conclusion and description of products that were determined to be DRC conflict-free it is unclear how...