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SEC's Conflict Minerals Rule Upheld

July-29-2013

Area Corporate Finance and Securities, Mining and Natural Resources

Summary

On July 23, 2013, the District Court for the District of Columbia upheld Rule 13p-1 under the Securities Exchange Act of 1934 (the “Exchange Act”). Adopted by the United States Securities and Exchange Commission’s (SEC) in August 2012, Rule 13p-1 requires public companies to disclose their use of “conflict minerals.”  Conflict minerals are defined to include gold, coltan, cassiterite and wolframite, along with all other minerals determined by the Secretary of State to be financing conflict in the Democratic Republic of Congo or an adjoining country.

The challenge to Rule 13p-1 was brought by three business trade groups who argued, among other things, that: (i) the requirement to publish conflict minerals disclosure on their websites constitutes compelled speech that violates the First Amendment, and (ii) in writing the Rule, the SEC was arbitrary and capricious.  The Court found that the plaintiffs’ claims lacked merit and did not find any problems with the SEC’s rulemaking practices.

The Court also disagreed with the plaintiffs’ argument that the SEC was ignoring its statutory requirement under the Exchange Act to “analyze properly the costs and benefits” of the Rule in a manner that considers whether the action will “promote efficiency, competition, and capital formation.” The Court ruled that the sections of the Exchange Act referenced by the plaintiffs do not require this type of analysis, but only suggest that the Court should consider the impact any rule would have on competition.

This decision can be contrasted with the District Court’s ruling earlier this month when it struck down Rule 13q-1 of the Exchange Act (refer to our Goodmans Update on July 8, 2013).  Rule 13q-1 required resource extraction issuers to file publicly available annual reports with information relating to any payments made to the U.S. federal or a foreign government for the purpose of the commercial development of oil, natural gas or minerals.

While the Court’s decision may be appealed, Rule 13p-1 remains in effect and issuers will be required to file initial reports with the SEC by May 31, 2014.

For further information on these rules, please contact any member of our Mining and Natural Resources Group.