On July 23, 2013, the U.S. District Court for the District of Columbia in a motion for summary judgment1 upheld the controversial conflict minerals rule promulgated last August. Companies should therefore proceed with preparing their first conflict minerals reports for the calendar year 2013, which are due May 31, 2014.   This week’s ruling is in contrast to a ruling by the same court earlier this month regarding a similar SEC rule related to resource extraction disclosures, where the resource extraction rule was vacated and remanded to the Securities and Exchange Commission (“SEC”) for further rulemaking.2

 

Background

 

Last year, the SEC issued Rule 13p-1, adopted under the Securities Exchange Act of 1934, as amended, concerning disclosure of the use of conflict minerals under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  Under the new rule, issuers must file new Form SD (“Specialized Disclosure”) to report the use of conflict minerals. Specifically, the rule requires an issuer to submit a report on the new Form SD if it uses “conflict minerals” that originated in the Democratic Republic of the Congo (the “DRC”) or an adjoining country in the manufacture of its products. Issuers must assess whether they are “DRC conflict free” or subject to the required reporting for the calendar year beginning January 1, 2013, with the first reports due May 31, 2014 and annual reports due each May 31 thereafter.

 

Conflict Minerals Rule Upheld

 

Given the burdensome nature of the new conflict minerals reporting requirements, several business trade groups, including the National Association of Manufacturers, the Chamber of Commerce of the United States of America and the Business Roundtable, challenged the controversial rule in U.S. District Court.3 The plaintiffs challenged the rule on the basis that: (1) various aspects of the rule were arbitrary and capricious under the Administrative Procedure Act (the “APA”), including the failure to include a de minimis exemption and coverage of issuers that “contract to manufacture” as opposed to only manufacturers, among other items, and (2) the disclosures required by the SEC in Rule 13p-1 (and by Congress in Section 1502 of the Dodd-Frank Act) run afoul of the First Amendment as companies are required to publish their conflict minerals disclosures on their own websites. The court failed to find issue with the SEC’s rulemaking.  The court, in applying the “intermediate scrutiny” standard of review, also failed to find that the rule violated the First Amendment, concluding that the government has an interest in “promoting peace and security in the DRC”, the conflict minerals rule advances “Congress’s interest in promoting peace and security in and around the DRC” and the disclosure scheme is “proportionate to the interests sought to be advanced.” Consequently, the court granted the SEC’s motion for summary judgment.

 

Action Items; Contact

In light of the court ruling, companies should re-focus efforts on compliance with the new conflict minerals rule as the first reports are due May 31, 2014. Even if the decision is appealed and the rule is subsequently struck down, it is unclear whether such action would occur before May 31, 2014. In complying with the conflict minerals rules, issuers should refer to the SEC Release issuing the rule as well as the FAQs published by the SEC last May, along with our earlier Client Alerts on these topics.4