SEC Concedes on Conflict Minerals Compliance Ruling

SEC Concedes on Conflict Minerals Compliance Ruling

The U.S. Securities and Exchange Commission’s (SEC) legal battle against the National Association of Manufacturers (NAM) is over, at least for now.

On March 4th, Attorney General Loretta E. Lynch submitted a letter to The Honorable Paul Ryan, Speaker of the U.S. House of Representatives, advising him of the SEC’s intent not to seek the Supreme Court’s review of the case.

Petitioning for a writ of certiorari, or asking for the Supreme Court to review the case, was the SEC’s last hope to have the 2014 U.S. Court of Appeals ruling overturned. In that ruling, a certain conflict mineral rule under Section 1502 of the Dodd-Frank Act was found to qualify as compelled speech under the First Amendment, and were therefore unconstitutional.

The rule in question was around mandatory conflict mineral disclosures, wherein companies were required to state whether their products were “DRC conflict free,” “not been found to be DRC conflict free,” or “DRC conflict undeterminable.”

In her letter, Lynch conceded this would not be a strong case for the Supreme Court to review. She said according to the U.S. Court of Appeals’ past ruling, the unconstitutionality was strictly in the structure of the rule, not the statute, or law, itself.

“The panel majority…expressly recognized that its holding of unconstitutionality may apply only to the [SEC’s] rule rather than to the underlying statute,” she wrote. “If, after remand, it is determined that the statute itself does not require use of the specific phrase ‘not been found to be DRC conflict free,’ the [SEC] could promulgate an amended disclosure rule that attempts to both fulfill the statutory mandate and to comport with the court of appeals’ view of the First Amendment.”

Click here to read the full letter.

 

What Does This Ruling Mean?

After the U.S. Court of Appeals first ruled in favor of NAM with regards to the constitutionality of the mandatory conflict mineral statement, the SEC issued a stay on the mandatory conflict mineral statement requirement.

Companies were no longer required to state whether or not their products were “DRC conflict free.” As a result, the requirement for independent private sector audits (IPSAs) was also removed for the 2014 and 2015 reporting year.

The SEC intended this stay to be temporary while it appealed the court’s decision. Despite the appeal being dropped, this case has not seen its last day in court.

The initial Court of Appeals ruling remanded the case back to the District Court for further proceedings. These proceedings will consider whether the judgment on the First Amendment applies to Section 1502 of the Dodd-Frank Act, or just to the SEC’s conflict mineral rule.

Depending on the results of the proceedings, Lynch indicated the SEC’s intent to review the disclosure rule post-remand in an attempt to remove the mandatory statement while still respecting the original intent of the law.

 

Background

This decision is the culmination of a long appeals process dating back to 2012, when NAM first challenged the SEC’s conflict mineral rules in Section 1502 of the Dodd-Frank Act. Although NAM’s arguments were originally rejected, in 2014 the U.S. Court of Appeals of the D.C. Circuit ruled Section 1502’s conflict mineral disclosure requirements qualified as compelled speech under the First Amendment and were therefore unconstitutional. At that time, the case was remanded to the District Court to decide how the judgment would be applied to the statute.

This process was put on hold when the SEC appealed the ruling in 2014. The SEC continued to exhaust every legal option until they were left with only a petition for a writ of certiorari. If granted, the Supreme Court would then review the U.S. Court of Appeals’ ruling on this case. After receiving two extensions, the deadline for the SEC to submit their petition was April 7th, 2016. However, Lynch’s letter withdrew the SEC from this process before the deadline was reached.

Now that the appeal process is over, the case will be remanded to the District Court as was originally ordered in the 2014 Court of Appeals ruling.

Assent Compliance’s regulatory experts have been closely following this case from the beginning. If you have any questions regarding this case, its resolution or the SEC’s stay on mandatory conflict mineral disclosures, contact us at info@assentcompliance.com.

For a background on this case, click here to read our blog.

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