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From Securities Regulation Daily, July 23, 2013.

Federal District Court upholds SEC conflict minerals regulation

By Jim Hamilton, J.D., LL.M

A federal district judge upheld SEC regulations implementing the conflict minerals provisions of the Dodd-Frank Act. The court was convinced that the Commission discharged any potential responsibility to consider whether the regulations will promote efficiency, competition, and capital formation, and that the Commission appropriately considered the impact on competition more generally. The court emphasized that the regulations were not promulgated by the Commission on its own accord, but rather the conflict minerals regulations were promulgated pursuant to an express, statutory directive from Congress, which was driven by a Congressional determination that the due diligence and disclosure requirements it enacted would help to promote peace and security in the DRC. As a result, said the court, the SEC rightly maintains that its role was not to “second-guess” Congress’s judgment as to the benefits of disclosure, but to, instead, promulgate a rule that would promote the benefits Congress identified and that would adhere closely to that congressional command. (National Association of Manufacturers, Chamber of Commerce and Business Roundtable v. SEC, Civil Action No. 13-cv-635 (RLW), D. D of C, July 23, 2013).

The final regulations became effective on November 13, 2012, and the first reports and disclosures it requires are due to be filed with the SEC by May 31, 2014. Ultimately, the Commission declined to adopt any categorical de minimis exception as part of the final rules. In the court’s view, the SEC’s de minimis determination was rationally based upon the evidence before it. While it may be true that the adoption of some type of de minimis approach could also have been a reasonable, alternative option, noted the court, this does not render the SEC’s contrary determination arbitrary or unreasonable.

Dodd-Frank Act. Section 1502 of the Dodd-Frank Act directs the Commission to issue rules requiring companies to disclose their use of conflict minerals if those minerals are necessary to the functionality or production of a product manufactured by those companies. Under the Act, those minerals include tantalum, tin, gold or tungsten.

SEC Conflict Minerals Regulations. The SEC regulations would apply to a company that uses any of the four designated minerals if the company files reports with the SEC under the Exchange Act and the minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company.

A company would be considered to be contracting to manufacture a product if it has some actual influence over the manufacturing of that product. This determination would be based on the facts and circumstances, taking into account the degree of influence the company exercises over the product’s manufacturing. A company would not be deemed to have influence over the manufacturing if it merely affixes its brand or logo to a generic product manufactured by a third party, services, maintains, or repairs a product manufactured by a third party, or specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.

Under the final regulations, a company that uses any of the designated minerals would be required to conduct a reasonable good faith country of origin inquiry reasonably designed to determine whether any of its minerals originated in the covered countries or are from scrap or recycled sources. If the inquiry determines that the company knows that the minerals did not originate in the covered countries or are from scrap or recycled sources or the company has no reason to believe that the minerals may have originated in the covered countries and may not be from scrap or recycled sources, then the company must disclose its determination, provide a brief description of the inquiry it undertook and the results of the inquiry on new Form SD filed with the Commission.

The company also would be required to make its description publicly available on its Internet website and provide the Internet address of that site in the Form SD.

Under the final regulation, companies that are required to file a Conflict Minerals Report would have to exercise due diligence on the source and chain of custody of their conflict minerals.

Court Upholds Regulations. The court rejected as having no statutory support the argument that the Commission was required to evaluate whether the Conflict Minerals Rule would actually achieve the social benefits Congress envisioned. Cases involving shortcomings on the Commission’s part with respect to the economic implications of its actions, economic implications that the SEC was statutorily required to consider in adopting the challenged rules, did not lend support to plaintiffs’ theory that the Conflict Minerals Rule must be invalidated because the SEC failed to consider whether the Rule would actually achieve the humanitarian benefits identified by Congress.

First Amendment Challenge. The court also rejected the plaintiffs constitutional attack against both the final regulations and Section 1502 of Dodd-Frank that contended that the obligation for companies to publish their conflict minerals disclosures on their own websites compels speech in violation of the First Amendment. The court found that the conflict minerals disclosure scheme directly and materially advances Congress’s interest in promoting peace and security in and around the DRC. All that Section 1502 and the SEC regulations require is that companies publish copies of their Form SD’s and/or Conflict Minerals Reports, that is verbatim copies of disclosures already prepared for and filed with the Commission on their websites. Neither Section 1502 nor the rule requires companies to separately or conspicuously publish on their website a list of products that have not been found to be DRC conflict free. Rather, companies can comply with these disclosure requirements simply by making their conflict minerals disclosures available on the same webpage that houses other required SEC filings, such as annual reports, proxy statements, and other investor-related information.

MainStory: TopStory DoddFrankAct

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