D.C. Circuit Upholds SEC Conflict Minerals Disclosure Rule

08/06/2013

Introduction

On July 23, 2013, the U.S. District Court for the District of Columbia1 (the “District Court”) upheld Rule 13(p) (the “Rule”) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). This Rule imposes investigative and public disclosure requirements on companies that use “conflict minerals” in their manufactured products. The District Court’s decision to uphold the Rule comes less than a month after the same court vacated an SEC rule governing disclosures by resource extraction issuers and remanded the rule to the SEC for revision.2 As a result of this most recent decision, companies to whom the Rule applies will be required to file a Form SD and Conflict Minerals Report, if applicable, regardless of their fiscal year end, by June 2, 20143 (for the calendar year 2013) and annually thereafter on each May 31.

Background

The Rule, adopted by the SEC on August 22, 2012, implements Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), which mandated the SEC to impose investigative and disclosure requirements on companies manufacturing products containing conflict minerals to determine whether said conflict minerals came from the Democratic Republic of the Congo and adjoining countries (together, the “Covered Countries”). Congress hopes this mandatory disclosure system will put pressure on companies to eliminate their use of conflict minerals from the Covered Countries, thereby reducing the financing of armed groups perpetuating conflict in the Covered Countries.

The Rule requires reporting companies that manufacture products with conflict minerals “necessary to the functionality or production” of the product annually to file a Form SD with the SEC. Companies filing a Form SD must conduct a “country of origin” inquiry to determine whether the conflict minerals originated in the Covered Countries and, in some instances, must file a Conflict Minerals Report detailing the due diligence performed on the source and chain of custody inquiry as an exhibit to its Form SD. For more detailed information on the Rule and its requirements, see our Client Alert dated September 24, 2012.

Conflict Minerals Rule Upheld

The National Association of Manufacturers, the U.S. Chamber of Commerce, and the Business Roundtable (together, the “Plaintiffs”) challenged the Rule on two grounds. First, they claimed that various aspects of the Rule, including the lack of a de minimis exception and the application of the Rule to companies that both “manufacture” and “contract to manufacture” products with conflict minerals, were “arbitrary and capricious” and, thus, in violation of the Administrative Procedures Act. Second, the Plaintiffs argued that the disclosures mandated by the Rule violated the First Amendment.

On cross motions for summary judgment, the District Court rejected both aspects of the challenge and upheld the Rule. Though the Plaintiffs argued that the SEC had inadequately analyzed the costs and benefits of the Rule and also whether such a rule was necessary to achieve Congress’s humanitarian objectives, the Court found “no problems with the SEC’s rulemaking” or interpretation of Section 1502 of Dodd-Frank. The Court also rejected the Plaintiffs’ First Amendment challenge, noting that the restriction on commercial speech was valid because the disclosure scheme would “directly advance” Congress’s goal of promoting peace and security in the Democratic Republic of the Congo.

Conclusion

Since the Rule has been upheld, the SEC estimates that around 6,000 U.S. and foreign companies will have to comply with the disclosure requirements. This compliance is estimated to cost companies $3 billion to $4 billion upfront and more than $200 million annually.

For now, companies should focus their efforts on compliance with the investigative and public disclosure requirements of the Rule. The deadline for filing the Form SD and Conflict Minerals Report, if applicable, is June 2, 2014. For more guidance on compliance, companies should refer to the SEC Release for the Rule, as well as the FAQs the SEC published on the Rule on May 30, 2013.4 

If you have any questions about this topic, please contact a member of our Capital Markets and Securities practice group.

Additional research assistance was provided by summer associates, Yvette Ferrer and Courtney Johnson.

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1 Natl. Ass’n of Manufacturers v. S.E.C., No. 13-cv-635(RLW), 2013 WL 3803918 (D.D.C. July 23, 2013).
2 Am. Petroleum Inst. V. S.E.C., No. 12-1668(JDB), 2013 WL 3307114 (D.D.C. July 2, 2013).
3 June 2, 2014 is the next business day after May 31, 2014. See General Instruction B to Form SD.
4 Conflict Minerals – Release No. 34-67716, The Securities and Exchange Commission, (August 22, 2012); Frequently Asked Questions – Conflict Minerals, The Securities and Exchange Commission, (May 30, 2013).

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