conflict minerals update: making sense of the appellate court decision and sec statement
TRANSCRIPT
GOOD. SMART.BUSINESS. PROFIT.TM
Conflict Minerals Update: Making Sense of the Appellate Court
Decision and SEC Statement
Thursday, May 22
Chelsie Chmela
Events Manager
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SPEAKING TODAY
Scott H. Kimpel
Partner, Hunton & Williams
Conflict Minerals Update: Making Sense of the Appellate Court Decision and SEC Statement
Scott H. Kimpel, PartnerMay 22, 2013
Overview
• Section 1502 of Dodd-Frank adds Sec. 13(p) of 34 Act• SEC adopted final rules in August 2012 (3-2 vote)• Conflict minerals are the “Three T’s”—tin, tantalum and
tungsten, as well as gold • Public companies that are manufacturers may be
required to report on conflict minerals originating in DRC and adjoining countries
• Public companies’ first reports to the SEC due no later than May 31; deferred to Monday, June 2, 2014
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Legal Challenge
• Broad agreement as to laudability of ending armed conflict in DRC• Ongoing debate as to whether the SEC’s rules, as adopted, will be
effective and whether SEC is the right government agency for advancing foreign policy objectives of this type
• Arguing that SEC overstepped its bounds in adopting the final rules, group of trade associations brought suit to challenge the rules shortly after their adoption
• On July 23, 2013, the US District Court for the District of Columbia rejected the plaintiffs’ challenge of the rules and granted the SEC summary judgment
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The Appeal
• On appeal to US Court of Appeals for DC Circuit, appellant trade associations argued that final rules are defective because SEC:– refused to create a de minimis exception for trace quantities; – expanded the scope of the rules to include conflict minerals that
“may have originated” in the DRC when Sec. 13(p) speaks only to minerals that “did originate” in that region;
– expanded the rules’ scope to non-manufacturers; and – provided for a transition period that unfairly distinguishes
between larger and smaller companies • Appellants also asserted that both Sec. 13(p) and the SEC’s rules
compel speech in violation of the First Amendment
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April 14: DC Circuit Opinion
• Court found no defect in administrative process and rejected four substantive arguments
• But Court held that the requirement in the rules and Sec. 13(p) to describe products as not “DRC conflict free” in SEC disclosures and on companies’ websites unconstitutionally compels speech
• Thus, Court held that the rules and Sec. 13(p) violate the First Amendment to the extent they require issuers to report that any of their products have “not been found to be “DRC conflict free”
• Opinion hedges in a footnote as to whether the First Amendment ruling applies just to the rules themselves or Section 13(p) too
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April 14: DC Circuit Opinion—Cont’d
• Concurrence suggested Court should have waited until disposition of another First Amendment case to be heard by en banc panel of DC Circuit
• Majority encouraged parties to join that case• Court remanded the rules to the district court for further
action• But Court withheld issuance of mandate until seven days
after disposition of any timely petition for rehearing or rehearing en banc, i.e., until June 5—three days after reports due
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Subsequent Chronology
• April 28: Joint Statement by Commissioners Gallagher and Piwowar urging total stay of rules
• April 29: Trade groups petition SEC for stay of rule• April 29: CF Director Keith Higgins issues Statement• May 2: SEC issues limited stay of rules re only those
portions found unconstitutional and endorses Higgins Statement
• May 5: Trade groups file Motion For Stay with DC Circ.• May 14: DC Circuit denies broader stay of the rules
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Higgins Statement
• June 2 deadline remains in place• Form SD, and any related Conflict Minerals Report,
should comply with and address those portions of the conflict minerals rules the DC Circuit upheld
• Thus, companies that do not need to file a CMR should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook
• For those companies that are required to file a CMR, the report should include a description of the due diligence that the company undertook
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Higgins Statement—Part 2
• If a company has products that fall within the scope of Items 1.01(c)(2) or 1.01(c)(2)(i) of Form SD, it would not have to identify the products as “DRC conflict undeterminable” or “not found to be ‘DRC conflict free,’” but instead should disclose, for those products, the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin
• No company is required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable”
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Higgins Statement—Part 3
• Nevertheless, if a company voluntarily elects to describe any of its products as “DRC conflict free” in its CMR, the company would be permitted to do so as long as it had obtained an independent private sector audit (IPSA) as required by the rules
• At this time, an IPSA will not be required unless a company voluntarily elects to describe a product as “DRC conflict free” in its CMR
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Next Steps
• Likelihood of further successful appeal before June 2 is low• Companies should plan to make filing by June 2 if their circumstances
require a Form SD or CMR• Keep SEC Statement in mind as you prepare filing; it is okay to omit
the constitutionally infirm descriptions• Precedent Filings: Silicon Precision Industries and Affymetrix • Remember: EU, Canada, several US states adopting own CM rules• Public pressure from customers, NGOs and investors to develop
conflict-free supply chains will remain• IR/PR function may wish to develop prepared answers to potential
inquiries from investors or other interested parties• Post-June 5: District Court will rule on remand, SEC may issue new
rules, and process may start all over
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