On July 23, the US District Court for the District of Columbia issued a decision granting the Securities and Exchange Commission’s motion for summary judgment in a challenge to the SEC’s “conflict minerals” rule that was promulgated in August 2012. As discussed in detail in the Corporate and Financial Weekly Digest edition of August, 24, 2012, and a Katten Client Advisory of August 31, 2012, Rule 13p-1 (Conflict Minerals Rule) under the Securities Exchange Act of 1934, as amended (Exchange Act), and the related requirements of Form SD, require each registrant that files reports with the SEC under Sections 13(a) or 15(d) of the Exchange Act (i) to determine whether it is covered by the Conflict Minerals Rule, (ii) if the rule is applicable to the issuer, to conduct a reasonable country of origin inquiry for its conflict minerals and (iii) if the issuer knows or has reason to believe that its conflict minerals may have originated in the Democratic Republic of Congo (or its adjoining countries), to use due diligence to more definitively determine the source and chain of custody of its conflict minerals and, in certain circumstances, to file a Conflict Minerals Report with the SEC.
The plaintiffs challenged the Conflict Minerals Rule on two grounds: first, that the SEC’s rulemaking was arbitrary and capricious under the Administrative Procedure Act and, second, that the requirement under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Conflict Minerals Rule to post conflict minerals disclosure on an issuer’s corporate website constitutes compelled speech in violation of the First Amendment. The court rejected the plaintiffs’ challenge that the SEC’s rulemaking was arbitrary and capricious, noting, among other things, that the SEC (i) properly considered whether the Conflict Minerals Rule would “promote efficiency, competition and capital formation” in accordance with the requirements of the Exchange Act, (ii) adequately evaluated the costs of the Conflict Minerals Rule and (iii) permissively construed Section 1502 when crafting the Conflict Minerals Rule. Similarly, the court rejected the plaintiffs’ First Amendment challenge, noting that the SEC’s requirement to report conflict minerals disclosure on an issuer’s corporate website was permissible under existing case law and, accordingly, satisfied applicable constitutional scrutiny.
While the plaintiffs may appeal the court’s ruling, issuers should be preparing to comply with the Conflict Minerals Rule for the calendar year beginning January 1, 2013 (regardless of the issuer’s fiscal year), with any initial Form SD required to be filed with the SEC no later than May 31, 2014.