On April 14, 2014, the Court of Appeals for the D.C. Circuit issued its opinion on the Securities and Exchange Commission‟s (“SEC”) Conflict Minerals Rule (the “Rule”), affirming the District Court in part and reversing in part. Nat’l Assoc. of Mfrs. v. SEC, No. 13-5252 (D.C. Cir. Apr. 14, 2014). In the decision, the court found that requiring issuers to describe their products as “not been found to be „DRC conflict free‟” in reports filed with the SEC and posted on issuers‟ websites violates the First Amendment. The court otherwise upheld the District Court, rejecting arguments that the final Rule violates the Administrative Procedure Act (“APA”) and the Securities Exchange Act of 1934 (“Exchange Act”).
As a result, with the first filing deadline quickly approaching on June 2, 2014, the implications resulting from this decision remain unclear. Until the dust settles, we recommend that issuers continue to prepare the appropriate filings.
For more information on the specifics of the Rule and the District Court‟s earlier decision, please read our memorandum dated September 25, 2012, available at Conflict Minerals Disclosure Adopted by SEC (Practical Steps for Compliance); our memorandum dated June 18, 2013, available at SEC Provides Additional Conflict Minerals Guidance; and our memorandum dated July 26, 2013, available at D.C. District Court Upholds Conflict Minerals Rule.
In the decision, the court first addressed the National Association of Manufacturers‟ (“NAM”) APA and Exchange Act claims. NAM challenged the SEC‟s decision to exclude an exception for de minimis use of conflict minerals, the implementation of a reasonable country of origin inquiry, the application of the Rule to those who contract to manufacture products, and the disparate transitional implementation periods for small issuers (versus large issuers). The court found these APA claims to be without merit, determining that the SEC had not acted arbitrarily or capriciously, abused its discretion, or otherwise exceeded its statutory jurisdiction. The court also analyzed and rejected NAM‟s claims that the SEC did not fulfill its duties to perform an adequate cost-benefit analysis of the final Rule.
The court then examined whether the requirement that issuers describe their products as “not been found to be „DRC conflict free‟” in reports filed with the SEC and posted on issuers‟ websites violates the First Amendment. According to the Rule, issuers must describe products as “not been found to be „DRC conflict free‟” when, after conducting a reasonable country of origin inquiry and any necessary due diligence, the issuer still has reason to believe its conflict minerals may have originated in covered countries. The court rejected the SEC‟s contention that rational basis review was appropriate, finding that rational basis review only applies to certain disclosures of “purely factual and uncontroversial information” and when those disclosures are reasonably related to preventing consumer deception. As neither party argued that the Rule relates to preventing consumer deception, the court used an intermediate standard of scrutiny for commercial speech that requires, in part, that the restriction be narrowly tailored. The court determined that the Rule‟s reporting requirements were not narrowly tailored because the SEC did not prove that NAM‟s suggested alternative reporting methods were any less effective.1 Accordingly, the court held that the underlying provision of the Exchange Act and final Rule violate the First Amendment “to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be „DRC conflict free.‟”” On its face, the court‟s ruling would appear to be quite narrow.
At this time, the implication of this decision for issuers remains unclear. As Judge Srinivasan points out in his dissent, the standard of review for compelled commercial speech is pending before the D.C. Circuit‟s en banc court.2 In American Meat Institute v. United States Department of Agriculture, No. 13-5281, the en banc court will consider whether compelled commercial speech can be reviewed under a rational basis standard even when the disclosures serve interests other than preventing consumer deception.3 If the en banc court answers this question in the affirmative, then the court‟s First Amendment conclusions regarding the conflict minerals disclosures would need to be reconsidered.
Due to the quickly approaching filing deadline and the uncertainties surrounding the court‟s First Amendment analysis, the SEC could choose to extend the deadline pending the en banc decision in American Meat, although they have not yet done so. Accordingly, with the requirement to file still in effect, our recommendation to issuers subject to the Rule is that they continue preparing any required specialized disclosure filing and submit the filing in a timely manner.