Currently I am in air somewhere above the midwest, but through the magic of in-air wifi, am able to post this in our efforts to keep readers updated.
By now, we expect our readers are well aware of this week’s court decision on NAM’s challenge to the SEC conflict minerals disclosure. The court upheld almost every aspect of the rule, striking down NAM’s challenge on:
- No de minimis exemption
- Triggering due diligence where issuers have “reason to believe” that conflict minerals “may have originated” in covered countries
- Applicability to contract manufacturing
- The temporary “DRC Conflict Undeterminable” status
- The SEC’s approach to quantifying the benefits of the disclosure
The sole issue the court sided with NAM on was that of compelling issuers to disclose products as “not been found to be DRC Conflict Free.” In plain English, it boils down to what few words are used to disclose products that are NOT DRC conflict free. The court’s explanation is summed up as follows:
… it is far from clear that the description at issue—whether a product is “conflict free”—is factual and non- ideological. Products and minerals do not fight conflicts. The label “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. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that “message” through “silence.” See Hurley, 515 U.S. at 573. By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.
Of course, this is probably more important after calendar year 2015, when the temporary “DRC Conflict Undeterminable” category expires and more companies may find themselves in this category to be named later.
So far, no one knows what will actually happen to the disclosure requirement or the May 31, 2014 filing deadline, although there is a plethora of expert opinions. One of the judges, in a concurring opinion, offered a solution of an enforcement stay for the part of the rule that relates to that wording only, leaving the remainder of the rule in effect.
We recommend that companies continue moving ahead with their compliance and filing plans.
Other excerpts from the decision that we think are most important/interesting are below.
[NAM] suggests that rather than the “conflict free” description the statute and rule require, 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 the issuers submit to the Commission.
But if issuers can determine the conflict status of their products from due diligence, then surely the Commission can use the same information to make the same determination. And a centralized list compiled by the Commission in one place may even be more convenient or trustworthy to investors and consumers. The Commission has failed to explain why (much less provide evidence that) the Association’s intuitive alternatives to regulating speech would be any less effective.
We therefore hold that 15 U.S.C. § 78m(p)(1)(A)(ii) & (E), and the Commission’s final rule, 56 Fed. Reg. at 56,362-65, violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”14
14 The requirement that an issuer use the particular descriptor “not been found to be ‘DRC conflict free’” may arise as a result of the Commission’s discretionary choices, and not as a result of the statute itself. We only hold that the statute violates the First Amendment to the extent that it imposes that description requirement. If the description is purely a result of the Commission’s rule, then our First Amendment holding leaves the statute itself unaffected.
From the concurring opinion:
The court, however, could stay enforcement of that aspect of the SEC’s rule pending disposition of the Association’s First Amendment claim … any adverse consequences for the SEC and the public would be limited because a stay would leave the bulk of the SEC’s rule (including the disclosure obligations) in place, affecting only the requirement to use a particular phrase.
It bears noting that there would be no evident need to stay any part of the statute, as opposed to the SEC’s rule. The Exchange Act requires covered manufacturers to list products qualifying as “not DRC conflict free” under the statutory definition.
The Act, however, contains no mandate to use any magic words when categorizing those products. Congress elected to use the descriptor, “not DRC conflict free,” in the Act, id. § 78m(p)(1)(A)(ii), but Congress imposed no requirement for manufacturers to use that (or any) particular phrase when describing their products. The latter obligation comes from the SEC’s rule, not the statute. The rule, moreover, compels use of the phrase, “not been found to be ‘DRC conflict free’”—rather than “not DRC conflict free”—an adjustment viewed by the agency to ameliorate any First Amendment objections by allowing for a more “accurate disclosure.”