Canada: U.S. Court Of Appeals Rules SEC Conflict Minerals Disclosure Requirement Unconstitutional

Co-author: Alice Lin, Student-at-Law

On April 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the U.S. Securities and Exchange Commission (the "SEC") rule requiring issuers to disclose whether they use "conflict minerals" in their products was unconstitutional because it would compel speech in violation of the First Amendment.¹ The circuit court remanded the matter to the district court, from where this case was appealed, for further consideration.

Background

In 2012, the SEC adopted a rule to implement the conflict mineral provisions in Section 1502 of the Dodd-Frank Act, which require disclosure and reporting regulations concerning the use of "conflict minerals." The term "conflict minerals" includes cassiterite, columbite-tantalite (coltan), gold, wolframite and their derivatives originating in the Democratic Republic of Congo and other adjoining countries (collectively, the "DRC").² The rule applies to SEC reporting companies, including smaller reporting companies and foreign private issuers, that manufacturer, or contract to have manufactured, products in which conflict minerals are necessary to their functionality or production. Specifically, the SEC rule and the underlying statute require such issuers to state on their websites that their products have "not been found to be 'DRC conflict free'" and to file a disclosure report on Form SD with the SEC. The Form SD is due annually by May 31 (extended to June 2 for 2014 because May 31 falls on a Saturday) for the prior calendar year.

Analysis

The circuit court found the label "conflict free" to be a "metaphor that conveys moral responsibility for the Congo war" and that forcing a company to use that language interferes with First Amendment protections. The SEC argued that rational basis review is appropriate because the conflict free label discloses purely non-ideological information. The circuit court disagreed, finding that rational basis review is the exception, not the rule, in First Amendment cases. While the U.S. Supreme Court has stated that rational basis review applies to certain disclosures of "purely factual and uncontroversial information," the circuit court relied on a previous ruling to hold that this is "limited to cases in which disclosure requirements are 'reasonably related to the State's interest in preventing deception of consumers.'" No party in the case had suggested that the conflict minerals rule was related to preventing consumer deception, and in the district court the SEC admitted that it was not.

The circuit court found that the SEC failed to present any evidence that a less restrictive approach would not achieve the rule's intended purpose. The circuit court considered "alternatives to regulating speech" – for example, issuers could use their own language to describe their products or the government could compile its own list of products that it believes are affiliated with the Congo war based on information issuers submit to the SEC. Without any evidence that alternatives would be less effective, the circuit court dismissed the SEC's claim that the restriction to speech as compelled by the disclosure requirement is narrowly tailored to achieve the rule's purpose. As a result, the circuit court found the SEC's conflict minerals disclosure rule violates the First Amendment, to the extent the SEC rule and the underlying statute require issuers to report to the SEC and to state on their websites that certain of their products have "not been found to be 'DRC conflict free'".

SEC Partial Stay and Guidance

On May 2, 2014, the SEC issued a partial stay of the conflict minerals disclosure rule, stating that companies will not be required to declare whether their products do, or do not, contain conflict minerals. Companies will, however, need to meet other reporting requirements under the SEC's conflict minerals disclosure rule. According to a guidance statement issued on April 29, 2014 by the SEC's Division of Corporate Finance, companies that do not need to file a Conflict Minerals Report with Form SD should still disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook in their Form SD filings. For companies that are required to file a Conflict Minerals Report in their Form SD filings, the report should include a description of the due diligence they undertook, but such companies need not describe their products as "DRC conflict undeterminable" or as having "not been found to be 'DRC conflict free'".

Footnotes

1. National Association of Manufacturers, et al. v. SEC, et al., No 13-5252 (D.C. Cir. April 14, 2014).

2. 17 CFR §240.13p-1 (2012).

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2014