On April 30, 2014, the U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance issued a statement on Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the conflict minerals rule) reaffirming an initial reporting deadline of June 2, 2014, for the first round of reporting on 2013 activity. This new guidance comes in the wake of a recent circuit court decision by the U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers, et al. v. SEC et al., No. 13-5252 (D.C. Cir. April 14, 2014), which concluded that Section 13(p)(1) and Rule 13p-1 “violate the First Amendment” because they require affected issuers to publicly state whether or not their products are Democratic Republic of the Congo (DRC) “conflict free.” The court found that forcing regulated companies to declare their products are not DRC “conflict free” would unfairly compel issuers “to confess blood on their hands.”
In all other respects, the court upheld the SEC’s rule-making, requiring companies using conflict minerals (tantalum, tin, tungsten or gold, or their derivatives, hereafter 3T+G or conflict minerals) that are “necessary to the functionality or production” of their products to undertake efforts to investigate where those minerals originated from and, if such minerals may have originated from the DRC or neighboring countries, to perform additional due diligence on the sourcing and chain of custody of the minerals. The court further held that there is no de minimus exemption, subjecting companies with small or trace amounts of conflict minerals in their products (if they satisfy the “necessary to the functionality or production” test) to these new reporting requirements.
The SEC’s April 30 statement on the conflict minerals rule comes one day after comments made by SEC Chair Mary Jo White at an April 29 congressional hearing on SEC oversight. Ms. White strongly signaled that the SEC’s position was not to make material changes to the conflict mineral rules, but to move forward with the execution and enforcement of the conflict minerals rules as anticipated. Ms. White’s comments and the SEC’s official statement help clear up some of the confusion that followed the April 28 joint statement of two SEC Commissioners (Gallagher and Pirowar) recommending a stay of the entire conflict minerals rule in light of the recent D.C. circuit court ruling.
The April 30 SEC statement also notably reduced the need for independent private sector audits (IPSA), clarifying that such audits are only required if the issuer voluntarily claims that its products are “DRC conflict free,” in which case an IPSA needs to accompany the conflict minerals report being submitted to the SEC. This may represent a cost savings to affected issuers and is a departure from the SEC’s previous rulemaking, which required IPSAs to be filed with conflict mineral reports for companies using conflict minerals originating from the DRC and neighboring countries.
Section 1502 was passed by Congress in an effort to impact and reduce the mass scale violence and human rights atrocities being committed in the DRC conflict, which Congress acknowledged is being fueled (and funded) as a result of exploitation of the mining activities regarding 3T+G minerals in the region. By requiring regulated companies to undertake diligence efforts to determine whether conflict minerals contained in their products are sourced from this region, this rule is geared to promote more peace and security for the region by reducing the illicit flow of funds from mining activity to armed groups fueling the conflict.
Companies are reminded that the SEC calls for a three-step approach toward their diligence efforts. (View previous newsletters for more information: SEC Issues New FAQs on Conflict Minerals Rules, Practical Guidance for Complying with Conflict Minerals Rules and SEC Issues Final Rules on Conflict Minerals.) Thus, companies using conflict minerals or those with complex supply chains are encouraged to undertake the required diligence needed to meet the initial June 2, 2014, reporting deadline.
The full content of the SEC Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule can be found here.