In remarks at the PLI Securities Regulation Institute yesterday, Corp Fin Deputy Director (Disclosure Operations) Shelley Parratt confirmed, as we all suspected, that it’s status quo on conflict minerals reporting again this year: the April 2014 statement by the Director of Corp Fin continues to be operative. (See this PubCo post.) In essence, the statement provides that “[n]o company is required to describe its products as ‘DRC conflict free,’ having ‘not been found to be ‘DRC conflict free,’ or ‘DRC conflict undeterminable.’ If a company voluntarily elects to describe any of its products as ‘DRC conflict free’ in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule. Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as ‘DRC conflict free’ in its Conflict Minerals Report.” [emphasis added] Companies may label their products as “conflict undeterminable” if they choose to do so.
Parratt warned that companies should be cautious to avoid the implication that their products are “conflict free,” unless they also include an IPSA. For example, if the company were to state in a conflict minerals report that, after conducting due diligence, the company had no reason to believe that the conflict minerals in its products came from a covered country, that could imply that the company was suggesting that the products were “conflict free.”
SideBar: It may be that, in that example, companies were conflating the standards in Steps Two (reasonable country-of-origin inquiry) and Three (due diligence on the source and chain of custody) of the conflict minerals analysis. In Step Two, if, based on its reasonable country-of-origin inquiry, among other things, the company has no reason to believe that the conflict minerals may have originated in the covered countries, the company is required to file a Form SD (without a conflict minerals report) and no further disclosure or process would be required under Step Three. In effect, these products would be considered to be “DRC conflict free.” In Step Three, the company must conduct substantial due diligence on the source and chain of custody of its conflict minerals to determine whether the company’s minerals directly or indirectly financed or benefited armed groups in the covered countries. Unless the company’s due diligence shows that the conflict minerals did not originate in the covered countries (or that they did come from recycled or scrap sources), the company is required to file a Conflict Minerals Report describing the due diligence process, the products that have “not been found to be DRC conflict free,” the processing facilities and other matters.
Parratt also observed that, in their conflict minerals reports, some companies identified the smelters by name and location, but did not provide the country of origin of the conflict minerals, raising the concern that readers might incorrectly infer that the conflict minerals originated at the smelter locations. She advised that companies should clearly state that the locations of the smelters are not the countries of origin of the conflict minerals in the company’s products.
SideBar: By the way, there’s apparently a new term for the intended effect of speechifying by the SEC staff: pirating the concept of “soft power,” the cognoscenti are now calling it “soft regulation.” Seemed pretty effective for non-GAAP financial measures. (See this PubCo post.)
With regard to descriptions of smelters and refiners, Parratt noted that companies sometimes describe them as “verified,” “active” or “compliant” or use other terms of art. She advised that companies should translate these terms for readers by explaining what they mean.
SideBar: And since we’re talking about conflict minerals, it’s interesting to note that the National Association of Manufacturers and the US Chamber of Commerce have both used the opportunity to comment on the SEC’s Concept Release related to modernizing business and financial disclosure requirements in Reg S-K (see this PubCo post) to protest again about the conflict minerals rules. How did they work that in, you ask, given that the conflict minerals rules are not in Reg S-K? As reported in Chemical Watch (what, you don’t subscribe?), NAM commented that it believes that “it is unreasonable for companies to continue to spend substantial resources implementing the rule when its central feature has been invalidated on constitutional grounds, and [it believes] the SEC and Congress should reexamine the statute and rule.” This argument was part of NAM’s central theme that currently required disclosures are overwhelming and burdensome, and that additional policy issues raised in the Concept Release related to environmental, social and governance (ESG) and political spending are not material to the reasonable investor. Likewise, the Chamber did not believe that “SEC-mandated disclosures should be used to further social, cultural or political motivations that the federal securities laws were not designed to advance. The SEC disclosure regime should not be an avenue for special interest activists to impose their agenda on shareholders at large. The difficulties associated with implementation of the ‘conflict minerals’ rule, for example, should be a cautionary tale for all.” Nevertheless, Corp Fin Director Keith Higgins reported that the highest proportion of comments so far received on the Reg S-K Concept Release related to better environmental and social responsibility disclosure. (See this PubCo post.)