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Now that NAM et al’s emergency stay motion in the conflicts minerals case has been denied, the question is what happens next.  Clues can be found in the briefing for the unsuccessful emergency stay motion.

For NAM et al to have been successful in the emergency stay motion, NAM et al would have had to make the following showing:

  • Probability of success on the merits that the rule should be vacated.  Here NAM et al argued the unconstitutional portion of the cannot be severed from the rest of the rule.  The reason is the rule is not severable is because the rule serves no purpose without the unconstitutional portion.  There were some collateral issues as well, such as whether the interim SEC guidance required notice and comment before being implemented.  For convenience, I will refer to this as the “severability issue.”
  • NAM et al will suffer irreparable harm absent a stay.
  • The balance of equities and the public interest favor a stay.

To illustrate a point, for all we know the three judge appellate panel firmly believed NAM et al clearly prevailed on the severability issue but perhaps the judges denied the motion because they did not think NAM et al and related issuers would suffer irreparable harm.  Of course, we don’t know because the order denying the stay was only one sentence long.

The original appellate court ruling which held a portion of the rule unconstitutional remanded the proceeding to the district court for proceedings consistent with the appellate court’s opinion.  The severability issue may be the only issue that matters in a ruling on the merits, and that is where NAM et al will have to hang their hat.

The fly in the ointment of the foregoing analysis is the SEC apparently can still move for an en banc rehearing of the original decision.  TheCorporateCounel.net notes an en banc hearing, if it occurs, will likely be a lengthy process:  The case has to be re-argued in front of the entire en banc court and the opinions must be circulated and considered among the much larger en banc court, resulting in the interval between oral argument and en banc disposition being five times greater, on average, as compared to a three-judge panel disposition.  Of course, the SEC could win, which I surmise leaves NAM with no alternative but to petition the Supreme Court for review.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The United States Court of Appeals for the District of Columbia has issued a per curiam  order denying NAM’s motion for an emergency stay of the conflict minerals rules.  Looked like kind of a moonshot anyway.  The order is one sentence long and was issued about 24 hours after NAM filed its reply brief.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

NAM et al have filed their reply brief in the conflict minerals emergency stay hearing.  Highlights, many of which are not new points, are:

  • The rule must be vacated because it cannot function sensibly without the stricken provision.  The rule’s remaining requirements fail to enable anyone to distinguish between issuers using minerals from mines controlled by armed groups and those using minerals from other mines.  “Only the confession requirement connects issuers to conflict. The rest of the Rule does not.”
  • Citing the severability language is not enough.  “It remains for the Court to determine whether such intent is rational.”  A severability provision is not even conclusive of intent.
  • The argument that unrecoverable compliance costs – no matter how large – can never constitute irreparable harm proves too much.  Otherwise any agency could adopt a rule without notice and comment and a stay would be impossible, regardless of expense incurred.

You can find a summary of the initial briefs here and links to the first two conflict minerals filings here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

In Yang v. Navigators Group, Inc. (S.D.N.Y. 2014), the court held the Dodd-Frank anti-retaliation statute does not clearly and unambiguously limit whistleblower protection to individuals who report violations to the SEC where the anti-retaliation provision simultaneously incorporates SOX protected reporting to supervisors. Courts continue to be split on the issue and the case offers a good analysis of existing law.  See our prior blogs on Murray and Asadi.

The court also noted that an employee is not required to communicate to the employer which laws the employer’s conduct allegedly violated.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

The second Form SD and related conflicts minerals report has been filed (our blog on the first one is here).  They are interesting documents but may still not be the holy grail of precedents because of, among other things, the use of terms like “Conflict Free Undeterminable” which drifts from the SEC lexicon of “DRC conflict undeterminable.”

And of course they freely make the “unconstitutional confession,” the downside of which may only exist in the minds of First Amendment lawyers.  I expect many issuers will not follow suit.  Because why do it if you don’t have too?

But it looks like someone with a complex supply chain that tried hard to do the right thing but not wanting to over lawyer the project in the process or add on layers of consultants.  It’s easy to imagine how this exercise taxed the precious resources of this accelerated filer with operational losses in ways not foreseen by the SEC’s cost-benefit analysis.

It does have some interesting statistics:

  • Of the 128 suppliers that are within the scope of the reasonable country of origin inquiry, the issuer received 74 responses to its request for information.
  • According to the filing “As the result of our due diligence survey, we have gathered 209 smelters and refineries names from our supply chain. Of those, 193 smelters and refineries are identified as CFSI’s known smelters and refineries, and 16 smelters and refineries are not validated or verified. Among these 193 smelters and refineries, 68 are on the list of CFSI’s certified Conflict Free Smelters (CFS) list and considered to be conflict free, and with respect to the other 125, the CFSI has not provided an opinion as whether or not the minerals procured from these smelters and refineries originate from the DRC or surrounding countries.”

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC has approved additional changes to the FINRA Corporate Financing Rule.  The approved changes:

  • expand the circumstances under which members and issuers may negotiate termination fees and rights of first refusal, with specified conditions;
  • exempt from the filing requirements exchange-traded funds formed as grantor or statutory trusts; and
  • codify the electronic filing requirement.

These changes are in addition to the approved changes we discussed in this blog.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Following its quarterly meeting, the Municipal Securities Rulemaking Board, or MSRB, stated its Board agreed to extend its pay-to-play rules to municipal advisors.

Other items on the MSRB’s regulatory agenda include:

  • The Board agreed to seek approval from the Securities and Exchange Commission (SEC) to implement a “best-execution” standard for transactions in the municipal market.
  • The Board also advanced three initiatives to enhance price transparency for municipal securities investors.
  • The Board also agreed to file with the SEC a modified proposal to require that dealers provide annual training on municipal securities to registered persons regularly engaged in municipal securities activities as part of the MSRB’s firm element continuing education requirements.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Andrew J. Bowden, Director, SEC Office of Compliance Inspections and Examinations, gave a talk where he discussed troubling practices identified in examinations of private equity advisers. Some of these include:

  • The most common observation SEC examiners have made when examining private equity firms has to do with the adviser’s collection of fees and allocation of expenses. When the SEC has examined how fees and expenses are handled by advisers to private equity funds, the SEC has identified what it believes are violations of law or material weaknesses in controls over 50% of the time.
  • Operating partners that are paid directly by portfolio companies or the funds without sufficient disclosure to investors. The SEC believes this effectively creates an additional “back door” fee that many investors do not expect, especially since operating partners often look and act just like other adviser employees.
  • Monitoring fees charged to portfolio companies by advisers in exchange for the adviser providing board and other advisory services during the portfolio company’s holding period. According to the SEC, despite the fact that private equity holding periods are typically around five years, some advisers have caused their portfolio companies to sign monitoring agreements that obligate them to pay monitoring fees for ten years … or longer. Some of these agreements run way past the term of the fund; some self-renew annually; and some have an indefinite term. Mr. Bowden noted that mergers, acquisitions, and IPOs trigger these agreements. At that point, the adviser collects a fee to terminate the monitoring agreement, which the adviser caused the portfolio company to sign in the first place. According to Mr. Bowden, the termination usually takes the form of the acceleration of all the monitoring fees due for the duration of the contract, discounted at the risk-free rate. Mr. Bowden believes there is usually no disclosure of this practice at the point when these monitoring agreements are signed, and the disclosure that does exist when the accelerations are triggered is usually too little too late.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

I hope NAM et al are successful in their motion for a stay of the conflict minerals rules, but it certainly isn’t a slam dunk.   The SEC has filed its response to the motion for emergency stay.  Predictably there isn’t a single point of agreement with both parties claiming their position is irrefutable.  Some of the highlights are:

NAM et al SEC
There is “substantial doubt” the SEC would have kept the rest of the regulation in its current form NAM must have failed to read the part of the rule that states if “any provision of this rule is held to be invalid such invalidity shall not affect the other provisions”
The unconstitutional requirement lies at the heart of the rule and the rule cannot function sensibly without it NAM has no proof this is what Congress intended
Irreparable harm occurs because affected issuers cannot sue the government for economic harm Ordinary compliance costs do not constitute irreparable harm.  The rule has been in effect for a long time and the bulk of the compliance costs have been incurred.  Sooner or later issuers are going to have to comply with this so the effort is not wasted.
The SEC stay and the guidance issued after the court decision required notice and comment before they took effect NAM does not cite any cases supporting its position

You can find the industry coalition amicus brief here and the Amnesty International amicus brief here.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

NAM et al’s original motion for an emergency stay in the conflict minerals case requested a decision by May 26, 2014, just ahead of the filing deadline for Form SD.  The United States Court of Appeals for the District of Columbia has issued a per curiam order that provides:

  • The SEC’s opposition is due by 3:00 p.m. on Friday, May 9, 2014
  • NAM et al’s further reply is due by 3:00 pm on Tuesday, May 13, 2014

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.