Since its adoption in 2012, the U.S. Securities and Exchange Commission's (SEC) conflict minerals rule has generated widespread controversy and prolonged litigation. Recent developments suggest that the conflict minerals litigation will continue for some time to come. Meanwhile, as a result of disclosures over the past two years, best practices and reporting trends are emerging. Interestingly, as the rule is litigated, nongovernmental organizations (NGOs), activist groups and other constituencies are encouraging companies to go beyond the minimum reporting requirements of the rule and adopt emergent leading practices in responsible sourcing initiatives.

Background of the Rule

In August 2012, the SEC adopted the final conflict-minerals rule implementing disclosure requirements aimed at reducing armed conflict in the Democratic Republic of Congo and its nine adjoining countries (DRC region). The rule requires companies to conduct a reasonable country-of-origin inquiry for any conflict minerals (gold, tantalum, tin and tungsten) that are necessary to the functionality or production of products that companies manufacture or contract to manufacture. Unless a company has no reason to believe any of its conflict minerals originated in the DRC region, it must then perform due diligence on the source and chain of custody of its conflict minerals.

The rule implemented a two-year transition period for large issuers, during which companies that declared their products “DRC conflict-undeterminable” were not required to obtain an independent private-sector audit (IPSA) of their due diligence measures. Under the rule, beginning with the 2015 reporting period, issuers (other than smaller reporting companies) are required to obtain an IPSA and describe their products as either “DRC conflict-free” or “not been found to be DRC conflict-free.”

Not surprisingly, the conflict minerals rule has generated litigation. In April 2014, the U.S. Court of Appeals for the D.C. Circuit held that the rule's requirement that companies describe their products as “not been found to be DRC conflict-free” is compelled speech that violates the First Amendment. In response to this ruling, the SEC issued a statement April 29, 2014, indicating that companies are not required to identify their products as “DRC conflict-free,” having “not been found to be DRC conflict-free” or “DRC conflict-undeterminable.” The April 29, 2014, statement further provides that, pending additional action by the SEC, an IPSA will not be required unless a company voluntarily chooses to describe a product as “DRC conflict-free” in its conflict minerals report, which is due by May 31 (or the first business day thereafter) each year since 2014.