July 24, 2013
Yesterday, the US District Court for the District of Columbia upheld the SEC's "conflict minerals" rule codified in new Rule 13(p) under the Securities Exchange Act of 1934. The decision can be accessed here. Companies that have been taking a wait-and-see approach in the hope that the rule would be invalidated should now begin the process of drafting and implementing compliance policies and programs (if they haven't already done so), and conducting supplier outreach with a view toward determining whether they are covered by the rule. We suggest companies take another look at the Staff's helpful Compliance & Disclosure Interpretations (CD&Is) dated May 30, 2013, which (among other things) exclude many service companies and make clear that product packaging generally is not covered by the rule. The SEC's CD&Is can be found here and our Alert dated June 10, 2013 is available here.
In ruling on cross-motions for summary judgment, the Court found "no problems with the SEC's rulemaking" and disagreed with the plaintiffs' position that the conflict minerals disclosure scheme violates the First Amendment of the Constitution. In the Court's view, the SEC's determinations, including with respect to the absence of a de minimis exception, were "not arbitrary, capricious, or contrary to law." All reporting companies, whether US or non-US, therefore will need to evaluate whether they are subject to the rules on conflict minerals disclosure covering calendar year 2013 and, if so, file a new report on Form SD with the SEC by May 31, 2014 (regardless of the company's own fiscal year). While there remains a possibility that the plaintiffs may appeal to the US Court of Appeals for the DC Circuit and, if so, that the Court of Appeals could reverse the decision, given the time frame and difficulties involved in the compliance process, companies should not wait to begin or continue their conflict minerals analyses.
Earlier this month, a different judge in the same Court vacated the SEC's "resource extraction" rule under Section 13(q) of the Exchange Act, which would have required issuers to publicly file annual reports containing information about payments made to the US or foreign governments for the commercial development of oil, natural gas, or minerals. The decision can be accessed here. The Court vacated the resource extraction rule and remanded the matter to the SEC for further action on the basis of "two substantial errors": (1) the SEC misread Section 13(q) to mandate public disclosure of the annual reports of governmental payments, and (2) the SEC's decision to deny any exemption from the rule for payments involving governments of countries that prohibit such disclosure was "arbitrary and capricious." The Court did not address plaintiffs' other arguments, including a First Amendment challenge. Because the Dodd-Frank Act of 2010 mandates that the SEC adopt rules to implement Section 13(q), the SEC will need to decide whether to appeal the Court's decision or commence a new rulemaking process.
For more detail on the conflict minerals and resource extraction rules, and recommendations on what to do now, see our Alert dated January 8, 2013 here.