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.