Companies awaiting the outcome of a legal challenge before starting to comply with the Securities and Exchange Commission's Conflict Minerals Rule received a blow in July when a US district court rejected that challenge.
Recent reports have shown that many companies have been laggard in starting compliance activities. A recent PwC study showed that 16.7 percent of companies had done little or nothing to comply, while another 32.6 percent were just getting started. A poll conducted by IHS showed the situation to be even worse than that.
We're now less than a year away from when the first reports under the rule need to be filed.
The conflict minerals regulation adopted by the SEC under the Dodd-Frank Act requires publicly traded companies to annually disclose information on the source of conflict minerals — tantalum, tin, gold, or tungsten sourced from the Democratic Republic of Congo (DRC) — contained in their products. Companies will have to begin to file this with the SEC information starting in May 2014 and to disclose that information on their websites.
Compiling the information required under the rule will force companies to make extensive inquiries on the origin of minerals contained in their products from suppliers all the way up the supply chain.
The National Association of Manufacturers (NAM), and other industry groups, challenged the rule in a federal court on several administrative grounds, including the failure of the SEC to consider less burdensome alternatives, as well as on the basis that the public disclosure of information violated companies' rights under the first amendment to the US Constitution. On July 23, the court rejected those claims.
In finding for the SEC, the district court rejected NAM's argument that the SEC failed to weigh the costs and benefits of the rule. The SEC was directed by Congress to issue the rule, the court noted, and the SEC was not in a position to second guess the congressional determination that the rule would promote Congress' intended humanitarian benefits.
NAM had also complained that the public disclosure requirement compels “burdensome and stigmatizing” speech in violation of the first amendment. NAM didn't contest the government's interest in promoting peace and security in the DRC and the court deferred to Congress that the required disclosures advance those goals.
The court also found that publishing disclosures on corporate websites represented a reasonable means to achieve Congress's objective of promoting peace and security in the DRC. The rule requires companies to publish reports that are filed with the SEC but doesn't require companies to separately publish a list of products that have not been found to be DRC conflict free. “Nor must companies physically label their products as such on the packaging itself,” the court noted.
NAM will surely appeal the ruling, but it's highly unlikely an appeals court will decide the case before the May 31, 2014 deadline for filing the first conflict minerals report with the SEC. In other words, companies that are behind the eight ball are stuck with the rule as it now stands, so they'd better start focusing their efforts on compliance.