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E-MailRichard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.
In the ongoing challenge to the SEC’s conflict minerals rule, the D.C. Circuit Court of Appeals, in a 2-1 decision, issued an opinion on August 18 upholding its April 2014 finding that a key aspect of the rule violates constitutional free-speech guarantees, a decision we discussed in this client newsflash.
Last year, the SEC asked the D.C. Circuit to rehear the case in light of the outcome of an unrelated First Amendment lawsuit, American Meat Institute v. United States Department of Agriculture, which addressed the proper standard of review for compelled commercial speech. Stating that it saw no reason to change its analysis in light of the American Meat decision, the court affirmed that it would adhere to its original judgment that portions of the Dodd-Frank Act, under which the rule was promulgated, and the SEC’s final rule, “violate the First Amendment to the extent the statute and rule require regulated entities 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.’’”
The SEC has not yet responded to yesterday’s decision, though it probably has a few options. The SEC could seek en banc review, which would allow the full circuit court (a majority of which, unlike the panel that issued yesterday’s ruling, consists of Democratic appointees) to reconsider the three-judge panel’s split decision. En banc rehearing of the case, if granted, would likely be a lengthy process, perhaps extending beyond the third Form SD filing deadline, next May 31. Alternatively, the SEC could decide to forgo further legal action and propose a revised version of the rule that addresses the appellate court’s First Amendment objections, which could also require substantial time to finalize—with no guarantee, of course, that another appeal would not follow.
The prospect of continued litigation notwithstanding, the conflict minerals rule remains partially in effect, and companies should continue with their compliance efforts. In May 2014, following the D.C. Circuit’s initial ruling, the SEC ordered a partial stay of the rule, discussed in this client newsflash, exempting companies from having to describe their products as “DRC conflict free,” having “not been found to be ‘DRC conflict free’” or “DRC conflict undeterminable.” The stay formalized guidance to the same effect issued by the SEC staff in April 2014, summarized in this client newsflash. In the April 2014 guidance, the SEC also excused companies from obtaining an independent private sector audit unless they voluntarily elected to describe products as “DRC conflict free.” Absent further clarification from the SEC, this concession appears to remain in effect—a relief to companies that otherwise would have needed to obtain an audit of their conflict minerals reports beginning with the current reporting year.
For additional information, please see our October 26, 2012 client memorandum, updated as of April 17, 2014, for an overview of the rule and a template Form SD.
