As part of the 2010 Dodd-Frank Wall Street Reform bill, the Securities and Exchange Commission was tasked with creating disclosure requirements for conflict materials originating from the Democratic Republic of Congo. The materials in question exist in everything from airplanes to every electronic device that makes our lives easier. The demand for these materials – and the money involved – led to warlords overtaking mines and creating an illegal trade to finance rebel activities.
The rules require that companies do an audit of their supply chain to determine if any of the parts used in their products originated from the DRC. They are to report their findings annually and indicate publicly (i.e. on their website) whether their products contain any conflict materials. They are also required to report this information to their investors.
The regulations have faced several court challenges from business groups. In July 2013, a federal judge upheld the rules. Last week, an appeals court ruled that the portion requiring public disclosure violates the constitution. In particular, it violates corporations’ free speech rights.
The court upheld the other portions of the rules which require the due diligence audit and reporting the information to investors.
While there was never any penalty for not reporting the information, supporters of the rules feel that transparency would help encourage manufacturers and their suppliers to more carefully source their materials. Human rights groups have pointed out that by doing the due diligence will eventually lead to ending the human costs of illegal sourcing. Many companies, including Apple, Hewlett-Packard, and Intel have all made efforts to ensure that the materials that go into their products are from conflict-free regions. It is estimated that their efforts alone have reduced funding to the rebels by as much as 75 percent in some instances.
The appeals court noted that the SEC could be remanded back to a lower court, where it could be determined if it was the wording in the SEC rules or the law which violated the First Amendment. The court also suggested that since the companies are required to do the due diligence, the government could collect the data and report the findings themselves. The SEC is currently reviewing its options.
Interestingly, this same court recently ruled in another public disclosure suit that new regulations requiring meat manufacturers to detail on their labeling the country of origin and where animals were born, raised, and slaughtered, could be enforced. The full panel of the court is rehearing the case and its decision, as one judge wrote, could put it in conflict with the SEC ruling. The rehearing on the meat labeling case is in May.
Industry groups are asking for a delay of enforcement of the remaining provisions of the rules, though the SEC has not indicated it is inclined to do so. On Wednesday a letter from Senator Dick Durbin and several others urged the SEC to continue with the planned enforcement. “The law we passed was simple,” they wrote. “Congress said that any company registered in the United States which uses any of a small list of key minerals from the DRC or its neighbors has to disclose in its SEC filing the use of those minerals and what is being done, if anything, to mitigate sourcing from those perpetuating DRC’s violence. Such transparency allows consumers and investors to know which companies source materials more responsibly in DRC and serves as a catalyst for industry to finally create clean supply chains out of Congo. This key provision was upheld in both court rulings.”
Still, the loss of the public disclosure rule robs supporters of an important tool – public pressure by customers for companies to do better.