On July 23, 2013, the United States District Court for the District of Columbia dismissed the challenge to the Securities and Exchange Commission (SEC) conflict minerals rules (the Rules) brought by a group of trade associations. The Rules were issued under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and require that public companies disclose the country of origin of certain minerals used in the products they manufacture or contract to manufacture.
The court determined, among other things, that:
- Although the SEC is required to consider the economic implications of a proposed rule, there is no statutory support for the plaintiffs’ argument that the SEC was required to consider whether the Rules would actually achieve the social benefits that Congress envisioned in enacting Section 1502 of the Dodd-Frank Act.
- Because the SEC issued the Rules pursuant to an express statutory directive from Congress via Section 1502 of the Dodd-Frank Act, the SEC rightly deferred to Congress’s determination that the due diligence and disclosure requirements of Section 1502 would help promote the social benefits envisioned by Congress. The SEC’s correct role was to issue a rule that would promote the benefits that Congress identified and hew closely to that Congressional command.
- The SEC did not act arbitrarily and capriciously with regard to estimating the cost of compliance of the proposed Rules because it adequately weighed comments to the proposed Rules and properly exercised its discretion in concluding which figures were most appropriate.
- The statutory language of Section 1502 of the Dodd-Frank Act was not unambiguous and the SEC’s rulemaking decisions were the products of reasoned decision making with respect to:
a.) Declining to adopt a de minimis exception;
b.) The “reasonable country of origin inquiry;”
c.) Extending the scope of the Rules beyond companies that manufacture products to also cover companies that “contract to manufacture products;” and
d.) Adopting different phase-in periods for “smaller reporting companies.”
- The Rules survive a First Amendment challenge under an intermediate scrutiny standard of review.
- The Rules will remain in effect, so companies should start their compliance process now or otherwise continue the compliance process in earnest.
- Even if the plaintiffs appeal the court’s decision, an appeal will likely not be concluded until after the May 31, 2014 deadline for the filing of the first Form SD, so companies should start their compliance process now or otherwise continue the compliance process in earnest.
- Did we mention that companies should start their compliance process now?