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August 23, 2015

D.C. Circuit Court Rules (Again) Against SEC Conflict Minerals Regulation

Last Tuesday, a three-judge panel from the U.S. Circuit Court for the District of Columbia reaffirmed an earlier ruling by the court against the Securities and Exchange Commission’s (SEC) conflict minerals rule. (As a reminder, in April 2014 a three-judge panel from the court ruled the regulation violated the First Amendment.) 

According to American Metal Market (subscription required), in its ruling last week the court said the SEC’s regulation essentially forces companies to “publicly condemn themselves.” Specifically, Judge Arthur Raymond Randolph wrote, “The label ‘(not) 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.” The majority also argued “the SEC could not quantify how forced disclosure would alleviate the humanitarian crises in the DRC.” 

The lawsuit, which MSCI supported, was brought by the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable in 2012. While the ruling is a victory for MSCI and its allies, the SEC’s regulation remains in effect. As the law firm Akin Gump reminded readers, after the initial ruling by the D.C. Circuit Court in April 2014, the SEC said:

  • Covered companies did not have to judge their covered products “DRC Conflict Free,” “DRC Conflict Undeterminable,” or “have not been found to be DRC Conflict Free”; and
  • It would no longer require an independent private sector audit “unless the company voluntarily elects to state that its products are DRC Conflict Free.”

The SEC has not yet revealed how it will respond to the most recent decision. However, The National Law Review believes the agency “will issue additional guidance to provide clarity as to issuers reporting obligations in light of this decision.” 

The ruling came the same day the Government Accountability Office (GAO) released a report that found the vast majority of companies that are required to file reports under the rule cannot determine the source of the conflict minerals they used. Specifically, the GAO report said, while 94 percent of companies “reported exercising due diligence on the source and chain of custody of conflict minerals used,” 67 percent “were unable to determine whether those minerals came from the DRC or adjoining countries … and none could determine whether the minerals financed or benefited armed groups in those countries.” The GAO didn’t make any recommendations based on its findings. 

The SEC has 90 days to appeal the ruling to the Supreme Court or decide if it wants petition for rehearing before the entire D.C. Circuit Court. Stay tuned to Connecting The Dots for the latest developments on this legal challenge and the SEC’s response to it.