In a statement issued on April 7th, the SEC’s Division of Corporate Finance announced that it will not recommend enforcement action against companies that do not complete due diligence of their supply chain as required under Section 1502 of the Dodd-Frank Act (the “Conflict Minerals Rule”). This statement followed the April 3, 2017 final judgment entered by the U.S. District Court for the District of Columbia in National Ass’n of Mfrs, et al. v. SEC, in which the U.S. Court of Appeals for the D.C. Circuit held that the Conflict Minerals Rule violates the First Amendment “to the extent that the statute and rule require regulated entities to report to the commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free.""1

The Conflict Minerals Rule requires a reporting company to carry out a three-step review process and report to the SEC on whether its sourcing of tin, tungsten, tantalum and/or gold is supporting armed groups in the Democratic Republic of the Congo or neighboring countries. First, the company must determine if it is subject to the rule. If it is, the company then moves to the second step and must conduct a “Reasonable Country of Origin Inquiry” to determine the country of origin of identified conflict minerals in its products (or contracted-for-manufacture products). Depending on the outcome of that inquiry, a reporting company may be required to take a third step requiring some or all of the following: due diligence on the source and chain of custody of conflict minerals, the filing of a Conflict Minerals Report with the SEC, and an independent private-sector audit of such a report.

The April 7th statement by the SEC’s Division of Corporate Finance provides that, in light of uncertainty generated by the court’s ruling, it “will not recommend enforcement action” where a subject company only completes the first two steps of the Conflict Minerals reporting process and does not conduct the third step. The SEC’s Acting Chairman, Michael Piwowar, issued a separate statement in which he noted that SEC staff are working on a recommendation for future Commission action. Mr. Piwowar said that the "primary function of the extensive and costly" conflict minerals due diligence requirement is to enable a company to satisfy the requirement that it disclose whether a substance is or is not “DRC-conflict free,” which requirement the court found to be unconstitutional. Supporters of the Rule, however, contend that the court’s ruling invalidated only one specific, severable component of the Conflict Minerals Rule and that the essence of the rule is not the labeling or description of products but disclosure of a company’s conflict minerals due diligence process. This issue has not yet been resolved.

In the meantime, companies that are subject to the Conflict Minerals Rule are still legally required to file conflict minerals reports and disclose their due diligence under Section 1502 of the Dodd-Frank Act and item 1.01 of Form SD. The April 7th statement by the SEC’s Division of Corporate Finance is clear that it expresses the position of the Division on enforcement action only, and does not express any legal conclusion on the Rule. Reports for calendar year 2016 are due no later than May 31, 2017.

1Nat’l Ass’n of Mfrs., et al. v. SEC, 800 F.3d 518, 530 (D.C. Cir 2015); Nat’l Ass’n of Mfrs., et al. v. SEC, No. 13-CF-000635 (D.D.C. Apr. 3, 2017).