Well, it wouldn’t be February without a “helpful” reminder that Form SD filings are due on May 31st and a new development that casts confusion over the process. This year, the confusion comes in the form of last week’s statement from Acting SEC Chairman Michael S. Piwowar declaring that he has “directed the staff to reconsider whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate.”
Leaving aside the bigger issue of whether anything about conflict minerals reporting is appropriate, this development once again means that companies will be approaching their filing deadlines without a clear understanding of what is going on.
Prior conflict minerals developments…
In April 2014, the Court of Appeals for the D.C. Circuit in National Association of Manufacturers v. SEC held that the rule’s requirement that companies state that their products have not been found to be “DRC conflict free” violated the First Amendment. Subsequently, the SEC staff released guidance relieving issuers of the obligation to put those labels in their reports. The case was subsequently remanded to the district court for further consideration and continues to work its way through the litigation process. In the meantime, companies have been filing Form SDs without stating that their products are “DRC conflict free” since doing so, according to the SEC’s guidance, would trigger the requirement for an independent private sector audit.
Acting Chairman Piwowar’s recent statement…
Acting Chairman Piwowar supported his statement, in part, with some personal observations:
“While visiting Africa last year, I heard first-hand from the people affected by this misguided rule. The disclosure requirements have caused a de facto boycott of minerals from portions of Africa, with effects far beyond the Congo-adjacent region. Legitimate mining operators are facing such onerous costs to comply with the rule that they are being put out of business. It is also unclear that the rule has in fact resulted in any reduction in the power and control of armed gangs or eased the human suffering of many innocent men, women, and children in the Congo and surrounding areas. Moreover, the withdrawal from the region may undermine U.S. national security interests by creating a vacuum filled by those with less benign interests.”
He further noted the ongoing litigation and the fact that the temporary interim transition period provided for in the rule has expired. He then solicited public comment on both the rule and the staff’s 2014 guidance during a 45-day comment period
What does this mean?
It is not yet clear whether this directive could impact upcoming filings related to 2016, though that appears unlikely in light of the comment period. This means that companies must assume that they will have to comply with the current rules and that the SEC will still monitor compliance. The following advice from a year ago (see this Doug’s Note) still, therefore, applies:
Review the Form SD filings of your peers. If you previously filed a Form SD, this allows you to compare your conclusions and disclosures to other companies in your industry. If you didn’t previously file a Form SD, it is a good way to collect information about your peers’ products and supply chain.
Separate the RCOI and due diligence disclosures. A Conflict Minerals Report (“CMR”) is required to be filed if the company either determines that its covered minerals came from one of the covered countries or is unable to determine that its covered minerals did not come from the covered countries. Draw clear distinctions between the reasonable country of origin inquiry and supply chain due diligence to make the CMRs easier to follow and help define the scope of any audits that may ultimately be required upon resolution of the pending litigation or further SEC rulemaking. The due diligence section should essentially track the five-step due diligence framework released by the Organisation for Economic Co-operation and Development (“OECD”), though it is not required to do so, in order to simplify any subsequent IPSAs.
Improve Smelter and Refiner Disclosure. Companies are expected to make ongoing, good faith inquiries that provide increasing visibility into their supply chain and applicable smelters and refiners. Continue to pressure suppliers to provide the information necessary to obtain this information. Review the Department of Commerce’s list of smelters and refiners that contains a list of all the processing facilities known by the U.S. government, as well as the Conflict Free Sourcing Initiative Lists, which helps companies identify whether the facilities are conflict-free.
Independent Private Sector Audits. A few companies have conducted mock audits or pre-audit readiness assessments. Alternatively, consider conducting a “gap analysis” to identify any gaps between the company’s compliance program and the requirements of the conflict minerals rule and the OECD framework.
Pressure from Stakeholders. More and more stakeholders other than the SEC, including customers, consumer groups and research firms, employees, non-governmental organizations and socially responsible investors, are closely scrutinizing conflict minerals disclosure. In implementing compliance procedures and crafting disclosure, companies should consider who their stakeholders are and what message they are trying to send.
Be flexible. As companies continue to integrate and improve their conflict minerals compliance programs, they should aim to design and structure the programs with enough flexibility to accommodate additional supply chain compliance initiatives outside the U.S.
Keep up with changing circumstances. Remember also that business operations are fluid—product lines, manufacturing processes, suppliers and product uses contantly change. Train employees to proactively and promptly pass along any changes in operations that could trigger the conflict minerals rules.