On July 23, the U.S. District Court for the District of Columbia
rejected a challenge to the conflict minerals rule adopted in
August 2012 by the SEC pursuant to Section 1502 of Dodd-Frank. The
conflict minerals rule imposes disclosure requirements for
reporting companies that manufacture or contract to manufacture a
product where "conflict minerals" are necessary to the
functionality or production of the product.
The plaintiffs—the National Association of Manufacturers,
the U.S. Chamber of Commerce, and Business Roundtable—had
filed a complaint challenging the conflict minerals rule on two
separate grounds:
- That the SEC, in adopting the rule, ignored its obligations under the Administrative Procedure Act, including to conduct a proper cost-benefit analysis; and
- That the disclosure required by the rule was a violation of the First Amendment, thereby rendering the rule unconstitutional.
On the first claim, the plaintiffs argued that the SEC was
required to weigh the purported humanitarian benefits of the rule
against the economic costs of implementing and complying with the
rule. The court rejected this argument because it determined that
although the securities laws require the SEC to
"consider" the effects of a new rule on various economic
factors—efficiency, competition, and capital
formation—these are merely considerations the SEC must take
into account in adopting new rules. As a result, the court
concluded that the Exchange Act does not require the SEC to conduct
a broad analysis of whether the rule would actually achieve the
social benefits envisioned by Congress.
In fact, the court determined that the SEC was not required to
evaluate whether the rule would achieve any of the humanitarian
benefits Congress envisioned in adopting Section 1502 of Dodd-Frank
and the SEC was in no position—and indeed did not have the
authority—to second-guess the views of Congress regarding the
benefits of conflict minerals disclosure. In reaching this
conclusion, the court distinguished the conflict minerals rule,
which Congress required the SEC to adopt in order to achieve
certain purported humanitarian benefits, from other rulemaking that
the SEC might undertake to achieve investor protection
objectives.
On the second claim, the plaintiffs argued that the conflict
minerals rule compelled "burdensome and stigmatizing
speech" in violation of the First Amendment by requiring
companies to post on their web sites the same conflict minerals
disclosure required to be filed with the SEC on Form SD,
effectively requiring companies to disclose on their web sites that
certain of their products are "not DRC conflict
free."
The plaintiffs conceded that although there was a substantial
government interest—the promotion of peace and security in
the DRC—the conflict minerals rule fails to directly and
materially advance that interest. The court disagreed with the
plaintiffs' claim that the rule does not directly and
materially advance the government's humanitarian interest. The
court noted that Congress adopted Section 1502 of Dodd-Frank based
on its informed judgment after an analysis of substantial evidence,
and that the judiciary, especially in areas of international
relations, must be deferential to these determinations by Congress.
The court specifically noted that the rule requires companies
simply to post Form SD disclosure on their web sites and does not
require companies to, for example, publish a list of products not
found to be "DRC conflict free" or physically label
products as such on the packaging.
For now, the schedule for the implementation of the conflict
minerals rule, as originally adopted, remains unchanged. Barring
any last-minute successful appeal, companies will be required to
file their first Form SD specialized disclosure report by May 31,
2014 for the 2013 calendar year and annually thereafter by May 31
of each year. Accordingly, companies should continue to compile the
information required to meet the May 31, 2014 deadline.
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