The US Court of Appeals for the District of Columbia has issued an opinion in the legal challenge to the conflict minerals rule adopted by the Securities and Exchange Commission in late 2012.
A divided court concluded that a portion of the statute and the SEC rule violate the First Amendment to the extent the statute and rule require issuers to report to the SEC and to state on their website that any of their products have “not been found to be DRC conflict free.”
While the petitioners had challenged the rule under the Administrative Procedures Act and the Securities Exchange Act of 1934 (including the failure of the SEC to adopt a de minimis exemption from reporting, criticism of the SEC’s cost-benefit analysis and alleged arbitrary actions by the SEC in adopting an extended phase-in period for smaller reporting companies), the court did not agree with those other challenges. The court remanded the case for further proceedings consistent with its opinion. A copy of the decision can be found here.
The conflict minerals rule applies to all issuers that file reports with the SEC under Section 13(a) or Section 15(d) of the Exchange Act, including foreign private issuers and smaller reporting companies. The rule requires those issuers to undertake a three-step analysis, as described in our earlier alert, to determine whether they are required to file (and the scope of) the report and the need for a third-party audit. If relevant, the rule requires issuers to file a Form SD (including, if required, a Conflict Minerals Report) by May 31 of each year. For 2014, the filing is due by June 2, 2014, since May 31, 2014 falls on a Saturday.
It is too soon to tell the exact impact of this decision, since there are many alternatives available to the parties. For example, it is possible that the SEC may file a petition for rehearing. The deadline for this petition is not until late May, and the court’s decision does not have any legal effect until “seven days after the disposition of any timely petition for rehearing or petition for rehearing en banc.” It is also possible that the SEC may modify the rule, stay the rule (or the portion determined to violate the First Amendment) or defer the effective date of the required filings pending resolution of the legal proceedings.
Given this uncertainty and the fact that only a limited portion of the rule was declared unconstitutional, we believe that issuers should continue their compliance and fact-gathering efforts in order to meet the June 2, 2014 filing deadline. We will continue to monitor further developments and provide additional guidance as appropriate.