SEC Conflict Minerals Rule Upheld By Circuit Court - With One Disappointing Exception

Yesterday, the D.C. Circuit Court issued an opinion upholding the integrity of the SEC conflict minerals rule in the case of National Association of Manufacturers v. SEC. Sustainable and responsible Investors (SRIs) largely applaud the ruling, commending the Court’s preservation of the vast majority of the conflict minerals reporting rule. A group of SRIs led by Responsible Sourcing Network voiced concern about the Court striking down one key element of the reporting requirements, which may have broader implications for shareholders.

This ruling mostly preserves the content of the final SEC rule pertaining to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, with the exception of one noteworthy reversal. The Circuit Court held that the rule’s obligation to report products using a ‘conflict-free’ designation violates First Amendment protections against “compelled speech”. In effect, the Court is saying that it would infringe on a company’s civil liberties to force them to communicate about human rights abuses existing/not existing in their supply chains.

This aspect of the ruling does not bode well for business transparency advocates. If this ruling were broadly interpreted, it would turn mandatory business disclosures that are important to consumers and investors into First Amendment violations. Failing to disclose products as ‘conflict-free’ or ‘not conflict-free’ keeps information from consumers and investors that is vital to supporting responsible consumption and investment decisions.

Sustainable and responsible investors commend the Court for maintaining all other material components of the law and reinforcing the authority of the SEC in the matter. In the statement, investors reiterate that their expectations for companies remain unchanged and urge companies to continue with original compliance efforts by submitting all necessary reporting forms to the SEC by May 31, 2014.

Investors have long made clear that they want companies to avoid risk by implementing robust supply chain reporting. The court’s ruling broadly recognized that fact, but we believe the court was mistaken in striking down the product designation requirement. As investors and concerned parties, we believe companies should continue to push forward with the most robust reporting possible.