On January 31, 2017, Michael Piwowar, Acting Chairman of the Securities and Exchange Commission (the “SEC”), issued two Statements regarding the current status of guidance on and implementation of the conflict minerals rules.
Background on the Conflict Minerals Rules
The conflict minerals rules are contained in Rule 13p-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in the related Form SD. Conflict minerals include columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives: tantalum, tin and tungsten. The conflict minerals rules require a registrant that files reports with the SEC under Sections 13(a) or 15(d) of the Exchange Act, having conflict minerals that are necessary to the functionality or production of a product manufactured or contracted by that registrant to be manufactured, to file a report on Form SD not later than May 31 of each year disclosing certain specified information. Among other things, if, based on a reasonable country of origin inquiry, the registrant knows that any of its necessary conflict minerals originated in the Democratic Republic of the Congo or adjoining countries (the “DRC Region”) and are not from recycled or scrap sources, or it has reason to believe that its necessary conflict minerals may have originated in the DRC Region and may not be from recycled or scrap sources, the registrant must exercise due diligence on the source and chain of custody of its conflict minerals. Unless, based on such due diligence, the registrant determines that its applicable conflict minerals did not originate in the DRC Region or did come from recycled or scrap sources, it must file a conflict minerals report (“CMR”) as an exhibit to the Form SD.
Under the conflict minerals rules, companies required to file a CMR must include an independent private sector audit (“IPSA”) with the CMR.[1] However, for a transition period of two years from November 13, 2012 for all registrants and four years for smaller reporting companies, the IPSA was not required for products determined to be “DRC conflict undeterminable.” This category applied when the registrant was unable to determine whether or not a product qualified as “DRC conflict free” after exercising required due diligence. A product is DRC conflict free if it does not contain necessary conflict minerals that directly or indirectly finance or benefit armed groups in the DRC Region. The rules require that after the transition period, if a registrant has not been able to affirmatively determine that its conflict minerals are DRC conflict free, it must describe those minerals as “having not been found to be ‘DRC conflict free.’”
The Litigation
The National Association of Manufacturers, Chamber of Commerce of the United States of America, and Business Roundtable challenged the conflict minerals rules in court, raising Administrative Procedure Act (“APA”), Exchange Act and First Amendment claims. The U.S. District Court for the District of Columbia originally ruled that the conflict minerals rules satisfied the requirements of the APA and the Exchange Act. The court also held that the conflict minerals rules passed muster under the analytic framework for the First Amendment claims. This lower court decision was appealed to the U.S. Court of Appeals for the District of Columbia Circuit, which affirmed the lower court decision on the APA and Exchange Act claims, but reversed on the First Amendment claims. The Appeals Court held that the conflict minerals rules violated the First Amendment to the extent that they require entities to state that any of their products have “not been found to be ‘DRC conflict free.’”
The SEC declined to appeal to the U.S. Supreme Court and the case was subsequently remanded to the District Court for further proceedings and remains ongoing. The District Court has ordered the parties to file a joint status report, on or before March 10, 2017, indicating whether further proceedings are necessary, and whether the Court should enter an order of final judgment to effectuate the decisions at the Circuit Appeals Court.
SEC Guidance
In April 2014, the SEC issued guidance (the “2014 Guidance”) on the effect of the Court of Appeals’ decision on the conflict minerals rules. It noted that companies must still file the required Form SD and comply with those portions of the rules that the Court upheld. However, no company would be required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” If a company voluntarily elects to describe any of its products as “DRC conflict free” in its CMR, it would be permitted to do so provided it had obtained an IPSA as required by the rule. However, pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as “DRC conflict free” in its CMR. The 2014 Guidance remains in effect today.
January 2017 Request for Comment
In his statement on the Commission’s Conflict Minerals Rule dated January 31, 2017, Acting Chairman Piwowar noted the unexpected duration of the litigation on the conflict minerals rules and that the reporting period beginning January 1, 2017 was the first reporting period for which no issuer falls within the terms of the transition period. In light of this, he directed the SEC staff to consider whether the 2014 Guidance is still appropriate and whether any additional relief is appropriate in the interim. The Statement also sought comment from interested parties.
In an additional Statement on the same day headed “Reconsideration of Conflict Minerals Rule Implementation,” Acting Chairman Piwowar also sought comment on all aspects of the conflict minerals rules and guidance. He noted that the rules appear to have resulted in a “tide of unintended consequences” rather than any reduction in the power and control of armed gangs.
Comments on the Statements are due on March 17, 2017. Given that the next filings of Form SDs are due on May 31, 2017, it appears unlikely that any change will occur in the conflict minerals rule requirements for this year.
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[1] The IPSA must express an opinion or conclusion as to whether the design of the company’s due diligence measures as set forth in the CMR is in conformity with, in all material respects, the criteria set forth in the nationally or internationally recognized due diligence framework used by the company, and whether the company’s description of the due diligence measures it performed as set forth in the CMR is consistent with the due diligence process that the company undertook.
