A number of NGOs have issued statements emphatically rejecting Corp Fin’s Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule and the Acting Chair’s separate Statement on conflict minerals (see this PubCo post) and calling for companies to disregard them and file their conflict minerals reports as usual. How will companies respond?
For example, the Enough Project, an NGO that has actively supported the conflict minerals rule, issued statements challenging the Acting Chair’s authority to take the action he took. The Associate Director of Policy charged that “[o]ne commissioner doesn’t have the authority to change the conflict minerals law or regulation unilaterally. Companies are still legally required to file conflict minerals reports and disclose their due diligence, according to the law that Congress passed and the SEC rule that the courts upheld. We look forward to reading companies’ full conflict minerals reports in May.” Similarly, the Project’s Policy Advisor indicated his concern “about the apparent attempt to gut the essence of conflict minerals due diligence without authority or cause. The goal of reports pursuant to Section 1502, and the focus of review by investors and the public, is to understand the specific steps companies have taken to address conflict minerals concerns. Specific labeling or description is not the essence of due diligence; meaningful and transparent action is.” Similarly, Global Witness has called the action by Corp Fin “irresponsible,” serving only “to benefit the criminal and corrupt seeking to profit from Congo’s minerals trade.” While GW acknowledged that the conflict minerals provision of Dodd-Frank is “not without its own challenges,” it nevertheless urged an immediate retraction of the statements of Corp Fin and the Acting Chair and pressed companies to disclose their supply chain due diligence efforts in their conflict minerals reports “regardless of Friday’s decision.” Amnesty has thus far been noticeably silent.
These statements, together with the comments of like tenor from Commissioner Kara Stein (see this PubCo post) as well as the call from four Senate Democrats for an investigation of the Acting Chair to determine if he has the authority to delay or revisit the conflict minerals rule (see this PubCo post), raise the question of whether there will be legal challenges to the SEC’s action here. Notably, the Updated Statement is not an action by the SEC as a whole, does not eliminate the rule or bind any court; it reflects only Corp Fin’s no-action position regarding enforcement and does not eliminate the possibility of private action, such as under Section 18. (Note, however, that per CDI 12 of the conflict minerals CDIs, Form SD has no effect on Form S-3 eligibility, so failure to file a conflict minerals report with the Form SD should have no impact in that context.) Will any NGOs or others challenge the SEC’s action in further litigation? Will they challenge companies — whether in litigation or through bad press — that, consistent with the Corp Fin statement, do not file conflict minerals reports that would otherwise be required?
What will be the practical effect of Corp Fin’s Updated Statement on conflict minerals filings this season? It will probably depend on the circumstances, as each company conducts its own risk-benefit analysis. Companies that are well along in their due diligence processes and preparation of the conflict minerals reports may end up essentially ignoring the Corp Fin statement, especially those that choose to be in the forefront of addressing the issue of conflict minerals or that potentially face adverse reactions, if they elect not to file a CMR, from shareholders or customers that are strong CSR advocates. Other companies may decide, after weighing risk and reward, to take advantage of the relief offered by the Corp Fin Updated Statement, omitting a CMR and providing Form SD disclosure addressing the company’s good faith reasonable country-of-origin inquiry and its results. This disclosure would likely provide an enhanced description of RCOI, particularly where, in the past, that discussion had been abbreviated in favor of a more expansive description of the entire RCOI/due diligence process in the CMR. Given that the no-action position requires companies to comply with paragraphs (a) and (b) of Item 1.01 — which address only the disclosure required when the company has no reason to believe that its conflict minerals may have originated in the DRC or other covered countries or where they are from scrap or recycled sources — we expect to see some form of guidance from the staff regarding the disclosure that will be expected where, as a result of their RCOIs, companies believe that their conflict minerals may have originated in the DRC or contiguous countries.