Download Conflict minerals update—SEC releases statement following

April 10, 2017
Conflict minerals update—SEC releases statement
following remand by the District Court of the
District of Columbia
By Lloyd Spencer and Carolyn Lowry
On April 7, 2017, the SEC’s Division of Corporation Finance stated that in light of the uncertainty
regarding how the SEC will resolve the issues related to the conflict minerals rule, it will not
recommend enforcement action if companies do not include the disclosure required by Item
1.01(c) of Form SD.
On April 3, 2017, the U.S. District Court for the District of Columbia entered a final judgment in
National Association of Manufacturers, et al. v. Securities and Exchange Commission and remanded
the case to the SEC. The district court ruled that Section 1502 of the Dodd-Frank Act, Exchange Act
Rule 13p-1 and Form SD violate the First Amendment. to the extent that the statute and the rule
require companies to report to the SEC and state on their websites if any of their products “have
not been found to be ‘DRC conflict free.” The April 3 judgment concludes a lengthy litigation that
challenged the conflict minerals rule adopted by the SEC in 2012.
Prior Actions
Under the conflict minerals rule, public companies, whose products contain conflict minerals, must
conduct a “reasonable country of origin inquiry” (RCOI)—involving a good faith investigation of
their supply chains—reasonably designed to determine whether the conflict minerals contained in
their products originated from the DRC or other covered country. If a company determines that
the conflict minerals included in its products originated from the DRC or has reason to believe that
the conflict minerals may have originated in the DRC or are not from recycled or scrap sources, the
company is (1) required to undertake a due diligence process with respect to the source and chain of
custody of such conflict minerals and (2) file a more detailed Conflict Minerals Report as an exhibit
to its annual Form SD, which must also be posted on the company’s website.
The conflict minerals rule was challenged in court and appealed to the U.S. Court of Appeals for
the District of Columbia Circuit, which found that the conflict minerals rule adopted by the SEC
violated the First Amendment right of free speech. The rule compels public companies to report to
the Commission and state on their website if any of the products they manufacture or contract to
manufacture have “not been found to be ‘DRC conflict free’” based on their supply chain diligence.
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In April 2014, the staff of the Division of Corporation Finance issued a response on the effects of
the circuit court’s decision in which it directed companies to file Form SD, including any Conflicts
Mineral Report required by Item 1.01(c) of Form SD, while also stating that companies need not
describe their products as “DRC conflict free,” having “not been found to be ‘DRC conflict free’” or
“DRC conflict undeterminable.” In addition, staff guidance has also provided that to the extent a
company does not describe their products as “DRC conflict free,” having “not been found to be
‘DRC conflict free,’” or “DRC conflict undeterminable,” it will not be required to provide the
independent private sector audit (IPSA), called for by Item 1.10(c) of Form SD.
The most recent decision by the district court appears to resolve the long-standing litigation on the
current iteration of the conflict minerals rule, but the remand to the SEC to take further action
means that there is still work to be done to resolve the rule’s ambiguities and provide appropriate
guidance for public companies subject to the rule.
The SEC’s response to the April 3, 2017 district court decision
In light of the April 3 district court decision, both the Acting Chairman of the SEC, Michael
Piwowar, and the SEC’s Division of Corporation Finance issued statements explaining that the SEC
will need to re-examine significant areas of the rule and address, in particular, whether congress’s
intent in Section 13(p)(1) of the Exchange Act can be achieved in a manner that avoids the
constitutional defect identified by the court and how that determination affects overall
implementation of the conflict minerals rule. The Division of Corporation Finance also stated that
in light of the uncertainty it will not recommend enforcement action for companies who (1)
comply with filing disclosures under the provisions of paragraph (a) (relates to the RCOI) and, if
applicable, paragraph (b) of Item 1.01 of Form SD, but (2) do not comply with the provisions of
paragraphs (c) of Item 1.01 of Form SD, which includes the requirements for due diligence on the
source and chain of custody of conflict minerals and filing of the Conflict Minerals Report and
associated IPSA.
This blanket no-action position by the staff goes significantly further than its previous guidance.
Then, the SEC provided that public companies were not required to affirmatively describe their
products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict
indeterminable” and were, therefore, not required to obtain an IPSA unless they voluntarily
identified any of their products as “conflict free.” Under prior guidance, companies were still
required to otherwise comply with paragraph (c) of Item 1.01. A reason for the change may be
found in the acting chairman’s statement in which he said “[t]he primary function of the extensive
and costly requirements for due diligence on the source and chain of custody of conflict minerals,
set forth in paragraph (c) of Item 1.01 of Form SD, is to enable companies to make the disclosure
found to be unconstitutional.” The Division of Corporation Finance noted that their “statement
expressed the Division’s position on enforcement only, and does not express any legal conclusion
on the rule.”
What does this decision mean for companies that are subject to conflict
minerals reporting requirements?
The guidance from the Division of Corporation Finance does not fully resolve the uncertainty
surrounding the fate of the rule and the legal and enforcement consequences for public companies
filing Form SD.
The due date for Form SD filings for calendar year 2016 is May 31, 2017. Companies should prepare
to file disclosures pursuant to paragraphs (a) and (b) of Item 1.01 of Form SD. While companies
filing Form SD can take comfort in the Division of Corporation Finance’s statement that it will not
recommend companies for enforcement action if they fail to file disclosures pursuant to paragraph
(c) of Item 1.01, it is likely that most companies have already completed the due diligence work and
at least started drafting their Conflict Minerals Reports. It is important to note that the statement
by the Division of Corporation Finance only pertains to enforcement. In making a decision
whether to follow the blanket no-action position and not include the Item 1.01(c) information,
public companies should consider that the Form SD is filed and not “furnished” with the SEC and,
therefore, is subject to Section 18 of Securities Exchange Act of 1934 as amended and private rights
of action.
Other developments concerning conflict minerals
In addition to the recent district court decision and the SEC guidance, the past few months have
brought other developments concerning conflict minerals. The SEC launched a request for public
comments relating to reconsideration of the conflict minerals guidance on January 31, 2017, which
resulted in the submission of thousands of comment letters prior to the closing of the comment
period on March 15. We expect that these comments will influence the SEC’s evaluation of the rule
following the remand of the district court, and it is possible that the SEC may seek additional public
comments.
The State Department has also recently waded into the issue of conflict minerals and is seeking
public input in connection with a review of “how best to support responsible sourcing of conflict
minerals.”1 Stakeholder comments are due by April 28.
For more information on the content of this alert, please contact your regular Nixon Peabody
attorney or:
— Lloyd H. Spencer at [email protected] or 202-585-8303
— Carolyn Lowry at [email protected] or 202-585-8822
1
https://www.federalregister.gov/documents/2017/03/27/2017-05972/notice-of-stakeholderconsultations-on-responsible-conflict-mineral-sourcing