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.

Court of Appeals’ Conflict Minerals Rule Decision is the Shiny Object – But Don’t Be Distracted

Many lawyers and supply chain managers (and reporters) have focused on the Court of Appeals’ August 18, 2015 decision confirming the court’s prior ruling that the Conflict Minerals Rule violates the First Amendment to the extent that it requires reporting companies to report that any of their products have “not been found to be ‘DRC conflict free.’” The decision was followed by a volume of news articles, law firm client alerts, and consultant webinars explaining the decision.  For our part, we posted a short blog post calling your attention to the decision. For the most part, they have all advised companies to stay the course – at least for now. Companies focusing on conflict minerals are talking with outside counsel, auditors, and consultants about what they should do in light of the decision, what changes or enhancements they should make to their compliance programs, and whether an independent private sector audit is likely to be required for calendar year 2015 reports. A lot of hand-wringing about how best to spend time and resources.

But, don’t be completely distracted by the Conflict Minerals Rule decision. Supply chain managers and compliance officers need to also turn a careful eye to what is happening in the context of the California Transparency in Supply Chains Act (California Supply Chain) disclosures. Two cases filed since August 19, 2015 are based on companies’ California Supply Chain statements and highlight the risks that come with gathering and analyzing information about your supply chain and with making disclosures as required by law (for more information, see our colleagues’ blog post here). You should consider the implication of these cases on disclosure in general and about the approach being taken to press companies beyond supply chain transparency to accomplish responsible sourcing. Those focusing on conflict minerals know that supply chain transparency is extremely difficult in its own right. Responsible sourcing is that much harder. So, great care should be taken in your disclosure — whether that disclosure is in response to the conflict minerals rule, the California Transparency in Supply Chains Act, industry guidelines, or other requirements.

In the client alert linked here, we discuss both the class action case against Costco Wholesale Corporation and several of its suppliers in Monica Sud v Costco Wholesale Corporation, US District Court for the Northern District of California, citing violations of the company’s disclosure under the California Transparency in Supply Chains Act and the Court of Appeals’ decision relating to the Conflict Minerals Rule.

We discuss these cases and suggest steps supply chain managers and compliance officers, across all industries, may consider in strengthening global compliance efficiently and effectively.

Supply Chain Policy and Disclosure Leads to Human Trafficking/Slave Labor Litigation

There has been a lot of discussion about the case against Costco relating to its California Transparency in Supply Chains Act disclosure.  Here is the link to the post about the Costco case that I co-wrote for our Global Supply Chain Law Blog .  This case is an example of how supply chain policy and disclosure can lead to litigation.   This has a connection to conflict minerals disclosure.  We’ll discuss that in more detail in our next post.

Conflict Minerals Decision – Now What?

Since December 2014, the U.S. Court of Appeals for the District of Columbia Circuit has been considering (again) the decision it reached previously about the constitutionality of the Conflict Minerals Rule. In an August 18, 2015 order, the Court of Appeals confirmed its earlier ruling that the Conflict Minerals Rule violates the First Amendment to the extent that it requires entities to state that any of their products have “not been found to be ‘DRC conflict free.’”

The Court spent a fair amount of time discussing the First Amendment analysis and the line of cases that govern here. But, the bottom line for commercial entities is that the original finding of the Court of Appeals has been confirmed.

Now that the case has been decided, the next step is to watch for the SEC’s reaction to the ruling and whether it will appeal the decision. The April 2014 SEC Statement (as implemented by the Partial Stay) reflects the SEC’s current expectation relating to filings. But, it is likely that the SEC will issue some guidance (and perhaps some FAQ’s) relating to conflict minerals rule to explain the obligations of entities in light of this decision.

SPIE: Conflict Minerals Reporting Challenges U.S. Companies and Their Suppliers

SPIE, the international society for optics and photonics, featured our very own Dynda Thomas, founder and leader of Squire Patton Boggs (US) LLP’s conflict minerals team, in a video presentation titled Conflict Minerals Reporting Challenges U.S. Companies and Their Suppliers.

Dynda provides background on the conflict minerals rule, discusses the application of the rule, and describes the approach to compliance with the rule.

Also featured in the presentation is Douglas Hileman, CRMA, CPEA, P.E., President of Douglas Hileman Consulting, LLC. Doug discusses the independent private sector audit.

To view the nine (9) minute presentation, please click here: Conflict Minerals Reporting Challenges U.S. Companies and Their Suppliers.