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Two SEC Commissioners Call for Halt to Conflict Minerals Reporting Requirement

Wednesday, April 30, 2014
Sandler, Travis & Rosenberg Trade Report

The two Republican commissioners of the Securities and Exchange Commission called on the agency this week to suspend its conflict minerals reporting requirements until there is a final outcome in an ongoing lawsuit challenging those requirements. The first reports are due by May 31 but a recent court decision overturning part of the SEC’s conflict minerals regulations has raised questions about whether those reports will or should be delayed.

Under the 2010 Dodd-Frank Act and SEC regulations implementing that law, companies that file reports with the SEC under the Securities and Exchange Act of 1934, whether foreign or domestic, must publicly disclose their use of tantalum, tin, gold or tungsten originating in the Democratic Republic of Congo or an adjoining country if those minerals are necessary to the functionality or production of a product they manufacture or contract to manufacture. The minerals at issue are used to make a wide range of goods such as cell phones, computers and video game systems, medical equipment, high-speed tools, machine parts, glass and lamps.

Among other things, the SEC regulations require companies that use any of the designated minerals to conduct a reasonable inquiry to determine whether they originated in the covered countries. If the inquiry determines that the company knows or has reason to believe that the minerals may have originated in those countries, the company must undertake due diligence on the source and chain of custody of its conflict minerals, file a conflict minerals report with the SEC and make that report publicly available on its Web site. The company must list in that report any products it manufactures or contracts to manufacture that are not found to be “DRC conflict free” (i.e., they contain minerals that may have directly or indirectly financed or benefitted armed groups in the covered countries). The first reports, covering calendar year 2013, are due May 31 and future reports covering successive years will be due annually on the same date.

SEC commissioners Daniel Gallagher and Michael Piwowar argued in an April 28 joint statement, however, that these reporting requirements should be suspended following a recent decision by the U.S. Court of Appeals for the District of Columbia Circuit that the requirement to publicly disclose that a company’s products may use conflict minerals violates First Amendment protections of free speech. Noting that the appeals court remanded the case to the district court to determine how much of the SEC’s conflict minerals rule is unconstitutional, the two officials said “a full stay” of the rule’s requirements “is essential because the district court could (and, in our view, should) determine that the entire rule is invalid.”

The commissioners explained that the First Amendment concerns “permeate all the required disclosures, not just the listing of products that have not been determined to be DRC conflict free,” and that a limited modification to the SEC’s regulations concerning the latter designation “would fail to fully address the First Amendment violation.” For example, they said, “the fact that an issuer would still be required to include a description of its due diligence procedures in its reports would suggest that the issuer may have ‘blood on its hands’ for its products since it is sourcing certain minerals from the DRC.” The commissioners also opined that the “name and shame” requirement to disclose the use of minerals that are not conflict free is “central” to the regulations and congressional intent and therefore “should not be seen as severable from the unconstitutional scarlet letter of ‘not DRC conflict free.’”

The commissioners expressed hope that further court decisions will force Congress to reconsider whether the law “achieves the benefits that it was supposed to attain.” They argued that the law and the SEC’s regulations have been “profoundly counterproductive, resulting in a de facto embargo on Congolese tin, tantalum, tungsten, and gold, thereby impoverishing approximately a million legitimate miners who cannot sell their products up the supply chain to U.S. companies.” They added that reconsidering the law’s “core approach would also save investors billions of dollars in compliance costs and ease the problem of information overload by eliminating special interest disclosures that are immaterial to investment decisions.” In the meantime, they said, “the wisest course of action would be for the Commission to stay the effectiveness of the entire rule until the litigation has concluded.”

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