Late Friday, April 7, the SEC issued two statements relating to the conflict minerals rule which reflect a significant change in the staff’s guidance for public companies.
The upshot of these statements is that the staff of the Division of Corporation Finance will not recommend enforcement action if companies subject to the rule
- do not conduct the supply chain diligence otherwise required under the rule and/or
- do not prepare and file a conflict minerals report if one would otherwise be required under the rule.
These statements were issued only days after the District Court entered a final judgment in the long-running case brought by the National Association of Manufacturers (“NAM”) seeking to have the rule set aside. The case was on remand from the U.S. Court of Appeals for the D.C. Circuit which ruled that Section 1502 of the Dodd-Frank Act and the SEC’s final conflict minerals rule “violate the First Amendment to the extent the statute and the rule require [issuers] 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.’” National Association of Manufacturers v. SEC, 800 F.3d 518, 530 (D.C. Cir. 2015). In the final order, the District Court judge similarly declared Section 1502 and Form SD unconstitutional, and set aside the conflict minerals rule, to the extent that they required companies to report and disclose that any of their products “have not been found to be ‘DRC conflict free.’” In addition, the court remanded to the SEC to take appropriate action on the conflict minerals rule in furtherance of the court’s decision.
But previously this year, Acting SEC Chairman Michael Pinowar published a statement directing the SEC staff to consider whether existing guidance was still appropriate and whether additional relief from the rule was appropriate until such time as the Commission could determine whether to revise the existing rules. Chairman Pinowar also solicited public comment on what the SEC should do with respect to the conflict minerals rule. The staff received hundreds of comment letters.
So on Friday, Acting Chairman Pinowar issued a new statement, indicating that he has directed the SEC staff to develop a recommendation as to “how to address the Court of Appeals decision – including whether Congress’s intent in Section 13(p)(1) can be achieved through a descriptor that avoids the constitutional defect identified by the court – and how that determination affects overall implementation of the [c]onflict [m]inerals rule.”
Additionally, he stated that until the uncertainties around the rule could be 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 provision requiring diligence and the conflict minerals report, and he noted its “primary function . . . is to enable companies to make the disclosure found to be unconstitutional.”
Immediately after the Pinowar statement was released, the staff of the Division of Corporation Finance issued a statement amending its 2014 guidance and announcing the “no enforcement recommendation” relating to non-compliance with Item 1.01(c).
Notwithstanding these statements from Acting Chairman PInowar and the SEC staff , it should be noted that these do not change the law or the conflict minerals rule. Issuers also should be aware that there have been complaints from certain members of Congress that Acting Chairman Pinowar may be acting beyond his authority in this area. That said, at this time issuers should consider whether they want to change their approach to compliance with the rule and stop any further supply chain diligence, preparing to file only the Form SD and not the conflict minerals report. Issuers may want to take into account the views of key customers -- we understand some prominent companies, including market leaders in the smart phone, computer and jewelry industries, have made very public statements about their insistence on “conflict free” supplies. This may mean those companies will continue to expect their suppliers to conduct diligence on their supply chains and otherwise conform to their respective conflict minerals policies.