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Conflict Mineral Rule to Move Ahead Despite Business Opposition

April 30, 2014

The SEC won’t stay its disclosure rule for conflict minerals despite a recent court ruling that struck down one of its provisions.In the view of the SEC’s leadership, the court “upheld the vast majority of that rulemaking,” while invalidating only a small portion of its disclosure requirements.

SEC Chair Mary Jo White said during an April 29, 2014, congressional hearing that the agency won’t stay its disclosure rule for conflict minerals despite a recent court ruling that struck down one of its provisions.

On April 14, the U.S. Court of Appeals for the District of Columbia Circuit sent Release No. 34-67716,Conflict Minerals,back to a lower court to reconsider a complaint from the National Association of Manufacturers, U.S.Chamber of Commerce, and Business Roundtable that the rule violated their First Amendment rights.The appeals court said a requirement in the Dodd-Frank Act and the SEC rule unfairly forced companies to state on their websites that their products had “not been found to be ‘DRC conflict free.'”

In response to Michigan Republican Bill Huizenga’s questions during a House Financial Services Committee hearing, White said the court “upheld the vast majority of that rulemaking,” while invalidating only a small portion of its requirements.

“So the intentions areā€¦ there probably will be guidance from the Division of Corporation Finance today or tomorrow that reporters [companies] under that set of regulations would be required to report as to the portions of the rule that have been clearly upheld in the court’s decisions,” White said. “As to the aspect that has not been, there will be no requirement to make those disclosures.”

Huizenga responded that there is no question that this rule will have a huge economic impact.He asked White, “Why not hit the pause button?”

White said, “The court went out of its way to uphold” most of the rule and invalidated one portion.

Manufacturers say the rule will add a big reporting burden and see little prospect that its implementation offers the humanitarian benefits its supports say it will provide.Compliance cost estimates range from $3 billion to $16 billion.Moreover, they say the rules are beyond the SEC’s traditional responsibilities of supervising the capital markets.

The day before White testified, the SEC’s two Republican commissioners, Daniel Gallagher and Michael Piwowar, ratcheted up the pressure to delay the rule’s implementation.

“The entirety of the rule should be stayed, and no further regulatory obligations should be imposed, pending the outcome of this litigation,” according to a statement from Gallagher and Piwowar. “A full stay is essential because the district court could, and in our view should, determine that the entire rule is invalid.”(See Commissioners Gallagher and Piwowar Seek Stay of Conflict Minerals Rule in the April 29, 2014, edition ofAccounting & Compliance Alert.)

Release No. 34-67716 mandated disclosure of the origination of the minerals tantalum, tin, gold, and tungsten used in goods from electronics equipment makers, gas pipeline suppliers, and other manufacturers of industrial equipment.

The Congo has large deposits of the minerals, and the disclosures require companies to file their first specialized reports on May 31, 2014, for 2013 and on May 31 in subsequent years.The disclosure requirement was added to Dodd-Frank because sales of the minerals have been used to fund arms used in the Congo’s civil war, and activist groups believe the disclosures will compel companies to seek alternate sources.

Members of Congress who backed the rule applauded Chair White’s statement that the agency won’t delay it.

“Sen. Durbin is pleased to hear SEC Chair White’s comments and looks forward to seeing the law implemented,” said Max Gleischman, the Illinois Democrat’s communications director.

Durbin and 11 Democrats in the House and Senate who sponsored the provision sent a letter to the SEC on April 21, saying that a delay isn’t warranted for the requirements while the free speech issues are resolved.

“I applaud SEC Chair Mary Jo White’s statement today, saying the agency will continue to implement the conflict minerals reporting rule,” said Rep. Jim McDermott of Washington in an emailed statement. “The SEC final rule should be upheld.I await the final guidance from the SEC and reiterate that this matter is, first and foremost, about saving lives in the midst of a humanitarian crisis and destructive civil war in the Democratic Republic of Congo.”

The business groups that brought the lawsuit didn’t respond to a request for comment as this story was being written.