As we blogged on Friday, for the last three years, companies have been following SEC staff guidance issued in April 2014, allowing them to file Conflict Mineral Reports (under cover of Form SD) without stating whether their products containing “necessary conflict minerals” are “DRC conflict free” (or some variation of that terminology). This guidance was issued in response to a ruling in early 2014 by the U.S. Court of Appeals for the D.C. Circuit that the requirement for such pejorative descriptions of company products violated the First Amendment of the Constitution. On April 3, 2017, the D.C. District Court, to which the case had been remanded for any further proceedings after the Court of Appeals panel reaffirmed its prior First Amendment holding in 2015, entered a final judgment in accordance with the decision of the Court of Appeals. Late Friday afternoon, Acting Chair Piwowar issued a statement indicating that he had instructed the Division of Corporation Finance to begin work on a recommendation on how best to address the Court of Appeals decision, asking the staff to focus in particular on whether there is a “descriptor” that addresses the constitutional defect identified by the Court, and to take into account, among other things, the public comments received in response to his January 31, 2017, request for comment on “all aspects of the [conflict minerals disclosure] rule and [the staff’s April 2014] guidance.”
Perhaps more significantly from the perspective of companies now working on their conflict minerals disclosure for the calendar-year 2016 reporting period (due on May 31, 2017), the Acting Chair further stated last Friday that, “[i]n light of the uncertainties, until these issues are resolved, it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.” Item 1.01(c) is the line-item requiring certain additional due diligence disclosures by companies that know, or have reason to believe, that any of their “necessary conflict minerals” originated in the Democratic Republic of the Congo or an adjoining country, and were not derived from recycled or scrap sources. The Division of Corporation Finance simultaneously issued an update to its April 2014 guidance, stating that the Division will not recommend enforcement action to the SEC if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD – essentially allowing them to dispense with the mandated disclosure of due diligence measures undertaken. Accordingly, the Division’s updated guidance permits companies to forgo an independent private sector audit (“IPSA”) unless they choose voluntarily to label their products containing necessary conflict minerals as “DRC conflict free.”
The SEC still must consider its next steps in light of any recommendation from the staff with respect to how the agency should address the Court of Appeals First Amendment holding and the additional comments received in response to the Acting Chair’s January 31, 2017 request for public comment. The outcome is further complicated by the anticipated transition from SEC Acting Chair Piwowar to SEC Chair nominee Clayton, if and when Mr. Clayton is confirmed by the full Senate. What happens next also may be influenced by the findings presented in a GAO report published on April 5, 2017, prepared for the House Subcommittee on Africa and Global Health Policy and Senate Committee on Foreign Relations, available here. This report provides useful insights from company conflict mineral disclosures and describes agency actions. Yet another complication may be the reaction of Democratic senators to Friday’s statements/guidance, as they have already sought an independent investigation by the SEC’s Inspector General of the Acting Chair’s decision in January 2017 to direct the staff to consider whether the existing conflict minerals disclosure rule and guidance are still appropriate and whether any further relief is appropriate in the interim, and to invite the public to comment on these issues.
Recognizing that many companies may be fairly far along in preparing their Conflict Minerals Reports for 2016 given the looming May 31 filing deadline, we recommend that companies falling within the ambit of Item 1.01(c) of Form SD carefully consider the costs and benefits of relying on the Division of Corporation Finance’s “no-action” position to dispense with the filing of such Reports during this period of regulatory uncertainty. Constituencies beyond the SEC, including but not limited to investors, customers, NGOs and other “stakeholders”, may react negatively to a comparatively “bare-bones” Form SD that complies solely with Items 1.01(a) and (b) of the Form. It is important to note that the Division’s no-action position binds neither the courts nor the SEC itself, acting as a body.