On April 14, the D.C. Circuit Court of Appeals issued an opinion in National Association of Manufacturers v. SEC, a case that sought to challenge the conflict minerals rule released by the Securities and Exchange Commission (“SEC”) in August 2012.
The Court largely rejected the plaintiffs’ challenges, holding that the SEC did not act arbitrarily or capriciously in adopting the due diligence and disclosure requirements of the rule and in deciding not to include a de minimis exception. The Court also stated that it “did not see any problems with the Commission’s cost-benefit analysis.”
The Court, however, did hold that the Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the conflict minerals rule violate the First Amendment of the U.S. Constitution to the extent the statute and the rule require issuers 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.’” In colorful language, the Court said: “[b]y compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.”
At this time, the case has been remanded to the D.C. District Court for further proceedings.
In the immediate aftermath of the Court’s decision, all companies subject to the rule should continue to prepare their disclosures in light of the June 2, 2014 deadline. The Court’s opinion has no legal effect until seven days after the Court has addressed any petitions for rehearing. After addressing any petitions for rehearing, the Court will issue its mandate — the earliest date on which that could occur will be in June, unless the Court decides to take earlier action.
Looking ahead, there are a range of potential scenarios. The Court could grant a petition for rehearing en banc. The SEC could decide to stay enforcement of the rule, pending the final outcome of the litigation, or could issue an interpretive order modifying the required terminology. The District Court could decide to stay all, or part, of the rule or the statute. Any stay issued by the District Court could be quite narrow – e.g., relieving companies only of the obligation to use the specific term “not DRC conflict free.”
What is clear, despite some early reports, is that the conflict minerals rule — which is estimated to impact nearly 6,000 SEC-reporting issuers and their suppliers – still stands. This is not a “pencils down” moment for those required to make the necessary disclosures.