Conflict Minerals Rehearing Denied — Is the Legal Challenge Over?

In a summary order handed down yesterday, November 9, 2015, the Court of Appeals for the D.C. Circuit rejected the petitions of the SEC and Amnesty International for a rehearing en banc of the Court’s August 2015 opinion (which reaffirmed its prior ruling that a small portion of the Conflict Minerals Rule violates the First Amendment). So, is the legal challenge over?  The short answer is “no.”

Possible Appeal to Supreme Court — In its pleadings, the SEC argued that the Court of Appeals rulings (both the one from April 2014 and the one from August 2015) conflict with Supreme Court precedent on compelled commercial speech and expressed concern about the impact of the rulings on other SEC disclosure requirements.  In light of those concerns (but not because of any overall support for social-goal oriented disclosure requirements), it seems likely that the SEC will appeal the ruling to the Supreme Court.   Since the August 2015 decision, there has been a lot of commentary by non-governmental organizations (NGO’s) and other advocates expressing disagreement with the First Amendment ruling.  But, interestingly that commentary focuses more on the impact of the First Amendment ruling on SEC disclosure requirements in general than on the importance of the specific product descriptor that was found to be unconstitutional.

Remand to the District Court —  If yesterday’s ruling is not appealed or if the appeal is rejected, the matter would go back to the U.S. District Court “for further proceedings.”  Those proceedings could be a simple recognition that one problematic product descriptor is not required, along with a remand of the rule to the SEC for revision in accordance with the rulings.   However, some are proposing that when the case is remanded to the U.S. District Court, the parties might seek to have other issues considered, a fight that would extend the legal challenge even further.

Timing? — What is clear is that whether or not the case is successfully appealed to the Supreme Court, a conclusion to the legal challenge of the Conflict Minerals Rule is still a long way off.  But, note that the rejection of the petitions for rehearing en banc is not a reason for companies to slow their inquiry or diligence efforts.  The April 2014 SEC Statement (as implemented by the SEC’s partial stay of the rule) continues to express the  SEC disclosure requirements for the year 3 reporting due by May 31, 2016.

Problematic Product Descriptor Here To Stay? —  While the legal challenge was underway, a number of NGO’s made it clear that they expect companies to use the very product descriptor that the Court of Appeals determined to be unconstitutional.  NGO groups that have scored and reported on some or all of last year’s SEC conflict minerals filings have stated that they will award “points” in their scoring systems to companies that use the problematic product descriptor in their disclosures.  So, even if the SEC is ultimately required to change the rule to remove that specific disclosure requirement, the NGO’s will likely continue to pressure companies to use that product descriptor.  The NGO’s are requiring what the Government cannot.

Move UK Slavery and Human Trafficking Compliance to the Top of Your To-Do List

On October 29, 2015, the UK Government issued Guidance on the requirements of the Modern Slavery Act.  The UK Modern Slavery Act requires many commercial organizations doing business in the UK to post a slavery and human trafficking statement on their homepages.  It is now clear that those businesses (especially those with year-ends on or after March 31, 2016) need to turn their attention to slavery and human trafficking compliance right away.

The first question that most entities are asking is when the statements must be posted.  Answer:

  • for a business with a year-end on or after March 31, 2016, its initial statement will cover its actions in the 2015-16 financial year (that is, this current year), and it will be among the first businesses to have to post statements.
  • for a business with a year-end on or before March 30, 2016, its initial statement will cover its actions in the 2016-17 financial year, and it will be able to delay posting its statement.

So, depending on your year-end date, you may have much more time before a statement must be posted.  For example, a business with a financial year-end of December 31, 2015 will cover the financial year ending December 31, 2016 in its first statement (posting no later than June 30, 2017).

However, a business with a financial year-end of April 30, 2016 will have to post its first statement covering the 2015-16 financial year (posting no later than October 31, 2016).

But, don’t be lulled by the October 2016 posting date.  Businesses with a financial year-end on or after March 31, 2016 actually have very little time to prepare their statement — and less time to develop, initiate, or enhance their human trafficking-related supply chain activities if they choose to do so during this current financial year.  Those already working on supply chain transparency know the time and effort required to set policy, engage with suppliers, provide training, and prepare responses to customers.  And developing remedial action plans may take even longer.

And, the businesses that have the early posting requirements must be aware that their statements will be posted (and therefore will be publicly available, reviewed, reported, scored and discussed) many months before other businesses’ statements are due.  Businesses with a year-end date before March 31, 2016 have a great advantage under this Guidance because they will be able to learn valuable lessons from the experience of the early filers.

Unlike other supply chain disclosures, the UK Modern Slavery Act does not set a date certain for when the statement must be posted each year.  But, the Guidance indicates that businesses are expected to publish their statements “as soon as reasonably practicable” after the end of the financial year and in all cases no more than six months after the year end.

In addition, the UK Government has also published a practical guide for affected businesses including “guidance” on what should be included in a slavery and human trafficking statement.   It is similar to, though much less detailed than, the California Resource Guide published in connection with the California Transparency in Supply Chains Act (which was a model for the UK Modern Slavery Act).

We have published an updated briefing note summarizing the steps that businesses should be taking now to prepare for this new obligation.  Keep in mind that the UK Modern Slavery Act is much more comprehensive than the California Act and expects transparency throughout the supply chain (not merely with direct suppliers).  And, it covers products and services.  Your supply chain transparency requirements may now be much broader.

EU Conflict Minerals Regulation Not Expected Until Mid-2016 – At the Earliest

We have been watching the EU process for some time, eager to determine when the EU conflict minerals regulation will finally be adopted. A source familiar with the EU Council proceedings has told us about the Council’s next steps, which will determine when the final consensus of the regulation can be expected.

The Council of the EU is currently developing its position on the conflict minerals regulation as proposed by the European Parliament on May 20, 2015. The Council working group met in September to discuss their preliminary views on the proposed regulation. During the September meeting, the European Commission presented its assessment of the draft regulation to the group. The presidency of the Council (which rotates between EU member states every 6 months) is held by Luxembourg until December 2015. We have learned that the Council aims to reach a position on the draft regulation during the Luxembourgish presidency (or by the end of 2015). Once this position is reached, trialogue negotiations with the Parliament and the Commission will begin. The result of those trialogue discussions would be a final consensus on the conflict minerals regulation.

Therefore, the timeline for the draft regulation will extend into 2016. The trialogue negotiations (among the EU Parliament, the Commission, and the Council) are not likely to begin until early 2016.

Event – Breakfast Briefing: Conflict Minerals 2.0 – The Second Wave of Compliance

Note: The following event is to take place on November 3, 2015 at 8:30 A.M. EDT at Squire Patton Boggs (US) LLP, 4900 Key Tower, 127 Public Square, Cleveland, OH 44114 and will not be broadcasted via webinar (i.e., this event must be attended in-person).


Companies have been living with the SEC’s conflict minerals rule since August 2012. What is in store for 2015 and beyond? What new developments and risks should companies be aware of?

Join Dynda Thomas and Sarah Rathke, partners at Squire Patton Boggs, and Douglas Hileman, President of Douglas Hileman Consulting, for an in-person briefing to find out.

We are pleased to have Doug Hileman join us for this Breakfast Briefing. His firm conducted an IPSA in each of the first two years of the Rule, and was one of only three US-based firms to do so for the 2014 reporting period.

The briefing will provide updates and insights on issues many companies are confronting for this reporting period – and as they plan their conflict minerals program for 2016. This briefing will focus on what reporting companies and their suppliers need to know about the following:

  • What is the impact of the recent Court of Appeals decision on the legal challenge?
  • How does this align with other SEC Guidance, industry standards, or enforceable requirements?
  • How are the conflict minerals filings being analyzed and ranked, by whom – and does this matter?
  • Will these studies influence how companies prepare their SEC filings for 2015?
  • How else can the NGO scoring reports be used to enhance conflict minerals programs?
  • Are companies required to provide an independent private sector audit (IPSA) with their calendar year 2015 report?
  • Why are some companies choosing to provide an IPSA?
  • What should be considered in an IPSA procurement?
  • How can you reduce the costs of an IPSA?
  • Can an IPSA actually help reduce other costs of your conflict minerals program?
  • What is the status of the proposed European regulation and what steps need to be taken to prepare for it?
  • Besides the requirements of the SEC Rule, what other risks can arise from conflict minerals?
  • What can be done to reduce these risks?

There will be ample time for questions and answers with the professionals, and for discussion with other affected companies.

To register for the breakfast briefing event, please click here.

SEC Seeks Rehearing in Conflict Minerals Case

October 2, 2015 marked another step in the continuing legal challenge of the conflict minerals rule.  The SEC and Amnesty International filed petitions requesting an en banc rehearing of the April 2014 and the August 2015 D.C. Court of Appeals panel decisions, in an effort to reverse the ruling that struck down portions of the conflict minerals rule as unconstitutional.

  • In April 2014, a panel of the D.C. Court of Appeals, in a split-decision, ruled that the portion of the conflict minerals rule that requires reporting companies to describe their products as having “not been found to be DRC conflict free” violates reporting companies’ First Amendment rights.
  • In August 2015, the same panel of the D.C. Court of Appeals, again in a split-decision, reaffirmed the April 2014 decision.
  • The SEC and Amnesty International requested an en banc rehearing (a rehearing in front of all of the judges of the D.C. Circuit Court of Appeals) of the portions of the panel opinions that address the First Amendment.
  • The request for the en banc rehearing will be granted if the active members of the D.C. Circuit Court of Appeals decide that all of the D.C. Circuit judges should weigh in on whether the August 2015 decision is inconsistent with American Meat Institute and other commercial speech First Amendment cases.

The real question being considered here is:  What is the right standard of review when determining whether the conflict minerals rule description requirement violates reporting companies’ First Amendment rights?

An important argument made by both the SEC and Amnesty International in support of their requests for an en banc rehearing is that the prior opinions address “issues of exceptional importance.”  They go on to say that if an element of the conflict minerals rule is found to be unconstitutional, other securities disclosure requirements will also be at risk for constitutional challenge.   In its petition, the SEC observes that the First Amendment holding in this case could have “far-reaching implications for governmental disclosure requirements, including those in the securities laws.”   The SEC is eager to assure that all securities disclosure laws (including the conflict minerals rule) will be subject to the relaxed or limited scrutiny of Zauderer, and would therefore be more likely to withstand First Amendment challenges, both in this case and for other cases in the future.

Those focusing on the conflict minerals rule may be disappointed that the decision on the request for rehearing, and the rehearing itself if granted, will have more to do with a line of First Amendment cases and arguments about the future of securities disclosure laws than the conflict minerals rule itself.

In the meantime, of course, reporting companies and all of their suppliers should continue to gather information about the smelters and refiners that process the conflict minerals in their products, and the country of origin, source, and chain of custody of the conflict minerals in their products.  Until there is new guidance from the SEC, reporting companies should continue to look to the April 2014 SEC Statement for guidance on what to include in their reports.

SEC Proposes To Vote On Final Resource Extraction Rule By June 27, 2016

In a previous post, we provided a summary of both the maneuverings of the SEC’s resource extraction rule after it was issued and Oxfam’s suit to speed up the SEC’s development of a revised rule after it was vacated.  As a reminder, on September 2, 2015 (nearly a year after the Oxfam case was filed), a federal judge gave the SEC a deadline to file an “expedited schedule” for issuing the final resource extraction rule — October 2, 2015.

As required, the SEC filed its expedited schedule today.  According to the filing, the SEC proposes to vote on the final rule on or before June 27, 2016.  To accomplish that, it will first have to:

  • complete and issue a revised proposed rule (which the SEC proposes to do by December 31, 2015)
  • provide at least 45 days for public comment
  • analyze the public comments
  • complete a draft final rule

The SEC was quick to emphasize that the deadline for the vote on the final rule represented an “extremely expedited timeframe” and advised the court that it might have to seek an extension of time to complete the rulemaking in light of:

  • what the SEC called an “unprecedented volume of enforcement, rulemaking, and other regulatory work”
  • the fact that the adoption of the rule requires a majority vote of the participating SEC Commissioners (and the composition of the Commission is changing — Republican Commissioner Gallagher’s last day on the Commission was to be October 2, 2015)
  • certain events that — if they occur — may make it impracticable to complete the rulemaking process on the proposed timeline (the SEC lists government shut-down, relevant international developments, and unexpected relevant legal developments as events that could delay the rulemaking process)

Remember, the resource extraction rule is not something that the SEC initiated on it own.  It was required to issue the resource extraction rule by Section 1504 of Dodd-Frank.  So, this rulemaking is required.  But, no doubt, the Oxfam litigation pushed the resource extraction rule ahead of other pending SEC rulemakings.

Conflict Minerals Rule Weekly Recap #102 – September 14, 2015

September 4, 2015 – September 11, 2015
The summaries provided in this Weekly Recap do not necessarily represent the views of Squire Patton Boggs (US) LLP and should not be deemed to be endorsements of them. The Recap is intended to be a compilation of articles and events to encourage discussion within the conflict minerals community and to keep our readers updated on the most recent developments.

NYT: Companies Struggle to Comply with Rules on Conflict Minerals

Lynnley Browning, in her article titled Companies Struggle to Comply with Rules on Conflict Minerals, highlights the challenges companies face in complying with the obligations of the conflict minerals rule.

In her article, Ms. Browning featured our very own Dynda Thomas, leader of the Squire Patton Boggs (US) LLP conflict minerals team. Dynda noted one of the specific challenges companies should consider when complying with the rule, particularly when drafting their public disclosure, stating “[companies] have to balance the risk of being a good corporate citizen with…getting sued by activist investors, consumers or nonprofits who unearth discrepancies.”

Government Finds “Most Companies Were Unable to Determine the Source of their Conflict Minerals”

Last month, the U.S. Government Accountability Office (the “GAO”) published a report titled SEC Conflict Minerals Rule: Initial Disclosures Indicate Most Companies Were Unable to Determine the Source of Their Conflict Minerals and found that in the 2014 filings (related to the 2013 calendar year) 67% of the companies in its generalized sample “were unable to determine whether [conflict minerals] came from the DRC or adjoining countries (Covered Countries), and none could determine whether the minerals financed or benefited armed groups in those countries. According to the GAO, companies “cited difficulty obtaining necessary information from suppliers because of delays and other challenges in communication.”

Supply & Demand Chain Executive – Conflict Minerals: The Time Is Near

In his article titled Conflict Minerals: The Time Is Near, Barry Hochfelder of Supply & Demand Chain Executive reports on a whole host of aspects related to the conflict minerals rule including, consumer and activist watchdog groups activities, the European Union conflict minerals draft regulation, a primer on the conflict minerals rule and gaining visibility into one’s supply chain.

In regards to gaining visibility into one’s supply chain, Barry echoes what we have been saying all along: “[w]hile performing this due diligence, companies would be wise to keep their eyes open for other violations.”

Supply Chain Disclosure Risk 30-Minute Boot Camp — September 15

Those of you involved with conflict minerals compliance will want to consider how recent supply chain litigation relates to your conflict minerals policies and disclosures.

In the last two posts in our Supply Chain Law blog (here  and here), we discussed the most recent supply chain litigation trend:  litigation based on companies’ California Transparency in Supply Chains Act disclosures.  We expect these cases to increase over the next weeks, months, and years, and predict that they will be expensive and distracting for companies that have to face them.

Please join us for a 30-minute “Boot Camp” discussing “Everything You Need to Know About Supply Chain Litigation Based on California Transparency in Supply Chain Act Disclosures and Other Supply Chain Public Disclosure Statements” on September 15, 2015 at 3:00 EDT.  We will talk about what companies, industries, and supply chain practices pose the most risk, and how to avoid facing these lawsuits by instituting robust compliance programs.  The presenters in this short program will be Sarah Rathke and Dynda Thomas, both of SPB’s Cleveland office.

To register the event, click here: 

Status on EU Conflict Minerals Regulation

The summer in Brussels is over and the European Parliament is back in session, following a month-long break in activity. This hiatus means that little has happened with the draft conflict minerals regulation over the past weeks. You will recall that the July meeting of the European Parliament Committee on International Trade (INTA) led to a vote in favor of entering into trialogue negotiations with the Council of the EU and the European Commission. These negotiations are now underway. In the meantime, the INTA committee met on August 31, but it did not discuss the draft conflict minerals regulation.

The next meeting of the INTA committee is scheduled for September 21 – 22. We expect that the issue of conflict minerals will be high on their list of priorities and it seems likely that there will be some substantive discussion of the draft regulation or at least the status of the trialogue negotiations at that meeting.

Resource Extraction Payment Rule — Not Everyone Wants to Let Sleeping Dogs Lie

On September 2, 2015, a federal judge ordered the SEC to file, by October 2, 2015, an “expedited schedule” for issuing the final resource extraction payment rule (which was required by Section 1504 of Dodd-Frank).

This order is added to an already complicated setting of: increased regulation from the US, states and other countries requiring diligence and disclosure on specific issues involving sourcing and supply chain, reluctance on the part of the SEC to spend its resources issuing and implementing regulations in pursuit of social goals, increased activism (and supply chain disclosure litigation), and the court decision on the First Amendment challenge to the conflict minerals rule (a companion rule to the resource extraction payment rule).

Of course, every step of the resource extraction payment rule case is being actively watched by mining and resource companies.  But, just in case you need the basics:

  • The Dodd-Frank Act becomes law in July 2010. Section 1504 of Dodd-Frank requires the SEC to issue rules requiring resource extraction companies to make annual disclosures to the SEC about payments made to foreign governments or the US government for the commercial development of oil, natural gas, or minerals.
  • On August 22, 2012, the SEC issues the rule (Rule 13q-1). The resource extraction payment rule is issued on the same day as the SEC’s conflict minerals rule. In connection with those rules, the SEC creates the Form SD which is intended to house the extraction payments disclosure and the conflict minerals rule disclosure. The form is modified in January 2015 to remove the exhibit that would have held the resource extraction payment disclosure.
  • On October 10, 2012, the American Petroleum Institute and others file a lawsuit in U.S. District Court challenging the resource extraction payment rule and asking for it to be vacated.
  • On July 2, 2013, the district court vacates the rule and remands it to the SEC to “reformulate” it and provide an adequate justification for choices it makes in developing the rule. The district court gives 2 reasons for vacating the rule: (1) the SEC was in error when it said that the section of Dodd-Frank required full public disclosure of the annual reports submitted to the SEC, and (2) the SEC’s unwillingness to give an exemption to the requirement where disclosure about such payments was prohibited by the foreign government was arbitrary and capricious.
  • Time passes. NGO’s and others object to the fact that no new rule is yet issued. Industry weighs in as well, voicing its objection to the rule and advocating that the SEC take into account other industry-related actions that have taken place since the first final rule was issued.
  • On September 18, 2014, Oxfam files an action to compel the SEC to promulgate a final resource extraction payments rule. Specifically, Oxfam asks the court to impose a schedule on the SEC to issue the proposed rule by August 1, 2015, allow a 45-day notice period for comments, and require a final rule by November 1, 2015.
  • Initially, the SEC announces a projected date for the revised proposed rule of March 2015 but that date is pushed back. As of early September 2015, the SEC indicates that it plans to “consider a revised proposed rule by October 2015” but does not announce a projected timeline for the issuance of the revised proposed rule.
  • In the SEC’s response to Oxfam, it argues that its response and timeliness regarding the issuing of the revised rule are reasonable under the circumstances, citing an “unprecedented volume of rulemaking” and competing priorities with other rulemakings that are required by Congress. And, interestingly, the SEC takes the opportunity to underscore that the SEC’s duty is to protect investors and the markets – again expressing (even if indirectly) that the SEC Chair Mary Jo White is disinclined to spend SEC time and resources on rules that promote social policy rather than on those that protect investors’ investment decisions.

Interestingly, the original district court decision that vacated the rule in 2013 did not reach any conclusions about whether the SEC’s economic analysis of the impact of the rule was sound or whether the requirements of the rule violate companies’ First Amendment rights (an issue being thoroughly litigated now through the conflict minerals rule challenge and the meat “country of origin” labeling case). Those two issues could be raised in later proceedings on the second “final” rule after it is ultimately issued by the SEC.

When the SEC’s expedited schedule is filed, we will post it here.