SEC's Conflict Minerals Rule Win Means the Clock Is Ticking

Last week, a federal court upheld the Securities and Exchange Commission's controversial conflict minerals rule, a Dodd-Frank Act requirement that companies must investigate and disclose the use of certain minerals mined in the war-torn Congo region of Africa.

Although an appeal is all but certain, companies now have even greater urgency to advance their compliance programs to meet the rule's new disclosure demands. The rule requires the first filings by May 31, 2014.

“Now that the final rule has been upheld, many companies that have delayed their investment of resources to comply really must pick up their efforts,” says Dynda Thomas, a partner with the law firm Squire Sanders.

The conflict minerals rule, mandated by the Dodd-Frank Act and enacted by the SEC, applies to the mining of tin, tungsten, tantalum, and gold in Central Africa that is considered a source of funding for militant groups. The SEC's verification and disclosure requirements are estimated to directly apply to nearly 6,000 companies and hundreds of thousands of their suppliers.

In October of 2012, the National Association of Manufacturers, the U.S. Chamber of Commerce, and the Business Roundtable challenged the rule, arguing that the SEC failed to do the proper cost-benefit analysis and violated the First Amendment by compelling companies to make “misleading and stigmatizing” public statements that suggest their products contribute to human rights abuses.

Some companies had delayed compliance efforts with the rule while the legal challenge played out. A survey published earlier this month by PwC found that 16 percent of the companies it surveyed said they had not done much to comply with the conflict minerals rule while they wait to see what happens with the legal challenge.

In a 63-page ruling, Judge Robert Wilkins of the U.S. District Court for the District of Columbia wrote that the plaintiff's claims “lack merit.”

With the highly anticipated case settled and, for now, left intact as enacted, companies no longer have any excuse to put off needed preparations, Thomas says. Reporting companies should begin, if they haven't already, organizing their internal teams, hiring external resources, and crafting a detailed compliance plan for the rest of this year.

“They should be talking with their audit firms to confirm their ability to audit any conflict minerals report that may be required,” she said, “Also, in light of this decision, audit committees and boards of directors will want to get an update on the status of compliance efforts." 

Many expect the decision to be appealed within the 30-day window, says Michael Littenberg, a partner with the law firm Schulte Roth & Zabel, who heads its conflict minerals practice, but few would recommend stalling compliance efforts to wait to see how an appeal turns out.

“The takeaway for companies is that we now only have slightly more than 10 months until the first filing is due, which may seem like a lot of time, but there is a lot of work companies need to do,” Littenberg says.

“If you've been sitting on the sidelines, you really do need to start your compliance in earnest,” he adds. “Most companies really don't have the luxury of sitting back to wait for a decision out of the appellate court.”

Littenberg says studies and polls have shown that many companies were slow to ramp-up compliance with the rule. For some, it is because of other priorities or a lack of bandwidth. Others may have been taking “a wait and see approach” until the legal challenge was resolved.

“Now that the final rule has been upheld, many companies that have delayed their investment of resources to comply really must pick up their efforts.”

—Dynda Thomas,

Partner,

Squire Sanders

“For the vast majority of companies, it is fair to say are still in the early stages of their compliance,” Littenberg says. “But if they pace it, and pay sufficient attention to it, they can certainly get what they need to done between now and May 31.”

For the current calendar year, covered companies are required to conduct a survey on whether their products contain, or they are contracting to manufacture something, that contains one of the targeted minerals.

No Time for Delay

Waiting any longer to tackle conflict minerals compliance is not a sound strategy, agrees Frank Murray, senior counsel at Foley & Lardner.

Tracing conflict minerals in the supply chain is a time- and resource-intensive process, he explains. It may require education of lower-tier suppliers about reporting issues, as well as considerable follow-up with suppliers to ensure they provide appropriate responses regarding the sourcing of minerals in their products. “This is not an area in which a company wants to be playing ‘catch up,' and the better practice has been, and continues to be, to press forward with compliance efforts on the assumption that the SEC rules will apply as written.” 

Lisa Jacobs, a partner in the Capital Markets Group of law firm Shearman & Sterling, says large companies were well aware that delaying compliance efforts pending a legal decision would be a “very risky and expensive proposition.” The process of vetting supply chains is enormous.

“A tractor contains 100,000 parts, and all of them need to be looked at,” she says, citing one example.

Jacobs says some companies learned, to their dismay, that the new requirements affected them. “Under this rule, every single public company has to think about it, even companies you wouldn't think had to,” she says.

Looking Forward

The reason some companies may have risked delaying compliance efforts as the legal challenge wound through the courts is that some Dodd-Frank Act rules have been thrown out by court decisions after a legal challenge. Earlier this month, for example, a rule requiring oil, gas, and mining companies to publicly disclose payments made to governments for extraction rights was vacated in Federal District Court and sent back to the SEC for a rewrite.

Unless the SEC successfully revisits the regulation or prevails in an appeal, approximately 1,100 companies will not have to report aggregated payments exceeding $100,000, a requirement that was to begin for those with fiscal years ending after Sept. 30, 2013. The grounds that the extractive rule was struck down under, however, “really were different arguments with a different set of facts,” from the conflict minerals challenge, says Littenberg.

In 2011, The U.S. Court of Appeals for the D.C. Circuit sided with the Chamber of Commerce and the Business Roundtable when it vacated the proxy access rule, effectively rejecting its use. The business groups had also charged then that the SEC failed to adequately research the costs of implementing the rule. The SEC declined to rework the rule, freeing companies from complying with it.

Thomas, however, says the likely appeal of the ruling on the conflict minerals rule must nevertheless be closely monitored.

The recent decisions in American Petroleum Institute v SEC and National Association of Manufacturers v National Labor Relations Board (a case that successfully argued NLRB's recess appointments by President Obama were unconstitutional) “gave some reason to believe that the petitioners might have been successful in a couple of their claims,” she says.

“It is not yet known what the next steps of an appeal will be,” she says. “But, any further legal action won't yield results anytime too soon and not likely in time to change companies' requirements for calendar-year 2013.”