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The SEC’s Dodd-Frank conflict minerals disclosure rules may come under legal scrutiny. The U.S. Chamber of Commerce, the National Association of Manufacturers (NAM), and the Business Roundtable (BRT) petitioned the U.S. Court of Appeals for the District of Columbia Circuit to review Section 1502 of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, concerning conflict minerals. The petition requests “that this rule be modified or set aside in whole or in part.” The respondent is the United States Securities and Exchange Commission (SEC), which adopted the final rule on August 22, 2012, and published the rule in the Federal Register on Sept. 12, 2012. The first Section 1502 disclosure will cover the calendar year beginning January 1, 2013, and must be filed with the SEC on or before May 31, 2014. The Chamber and the other petitioners alleged in a statement that the rule is “unworkable, overly broad and burdensome.”
If this petition is successful, it would mean that the SEC would have to modify the rules regarding the implementation of Section 1502 of the Dodd-Frank Act, which requires companies listed with the SEC to perform due diligence to investigate whether conflict minerals that are “necessary to the functionality or production” of their products originated in one of the ten countries covered by this regulation. The term “conflict mineral” is defined in this rule as cassiterite, columbite-tantalite, gold, wolframite, as well as their “3T” derivatives, which include tantalum, tin and tungsten.
While the full brief remains forthcoming, the Preliminary Statement of Issues filed by the petitioner includes requests for the Court to examine the following:
- Whether the Commission’s economic analysis is inadequate.
- Whether the following are “erroneous, arbitrary and capricious, or an abuse of discretion”:
- The Commission’s refusal to adopt a de minimus exception,
- The Commission’s interpretation of the House Resolution’s definition of manufacturers as including those who “contract to manufacture” products,
- The Commission’s interpretation of “did originate” in the covered countries as “reason to believe that its necessary conflict minerals may have originated,”
- The standard and requirements imposed by the “reasonable country of origin inquiry,” and
- The structure of the transition period established by the rule.
- The petition also included the question of whether the rule compels speech in violation of the First Amendment.
The SEC agreed to an expedited schedule, which may help to resolve uncertainty about the validity of the rule as soon as feasible. Final Briefs are due on March 28, 2013. In the interim, those interested in following the arguments can look for the Brief for Petitioners, which is due by January 16, 2013, the Brief for Respondent is then due by March 1, and the Reply Brief for Petitioners is due March 22. The ruling by the Court will occur sometime after March 28, 2013.
Looking forward, there are several possibilities for what can take place now that this petition is filed with the U.S. Court of Appeals. These include:
- If the appeal fails or is withdrawn, the SEC ruling will be implemented as it currently exists.
- If the petition succeeds, the SEC must implement the Court’s ruling, or it could choose to appeal the decision to the U.S. Supreme Court. It is considered unlikely that the SEC will choose to appeal, as the SEC did not appeal two previous findings against Dodd-Frank by the same Court.
- The Court can issue injunctive relief until the parties complete negotiations, or until the SEC modifies the conflict minerals rule under examination.
- The Court may issue a stay of proceedings, which would postpone proceedings indefinitely.
- One or both parties can file motions for leave and thus delay the ruling on the case.
- The parties may also choose to negotiate outside of court, which would result in the SEC re-writing the rules as agreed upon between the SEC and the petitioners. In such an instance, the Court will hold the case in abeyance (suspension) pending settlement.
Some commentators expect the challenge to the SEC’s rules to succeed; SEC regulations have been challenged several times in the last few years in the U.S. Court of Appeals for the DC Circuit, and the SEC has lost every time. However, other experts point out that this case is different because Congress required the SEC to act in this case, and the SEC referenced Congressional intent when writing the rules, after an exhaustive alternatives examination for each conclusion it drew. These observers are doubtful that the petition will succeed, and instead expect the rule to be carried out as written.
Amnesty International filed a petition on November 19, 2012 to intervene in this proceeding as a Respondent, arguing that it has an interest in the proceeding due to the fact that the organization participated in the underlying rulemaking and that it intends to rely on information required to be disclosed under the rule to make investment and purchasing decisions. It also argues that its interest goes beyond those of the SEC, as SEC is charged with protecting investors, maintaining markets, and facilitating capital information, while Amnesty International has an interest as well in the human rights-related goals of Section 1502.
All companies registered under the Securities Exchange Act of 1934 must comply. While the rule applies to all covered products manufactured after January 1, 2013, it could be helpful for your company to know about an important exemption — any of your products that contain conflict minerals that are outside your supply chain by January 31, 2013 will be exempt from this rule. Under the final rule, conflict minerals are considered to be “outside the supply chain” if they have been smelted or fully refined or, if they have not been smelted or fully refined, they are outside the Covered Countries (the Democratic Republic of the Congo and all adjoining countries).