On April 7, 2017, the Securities and Exchange Commission ("SEC") Division of Corporate Finance (the "Division") indicated that it will not recommend enforcement of the conflict minerals source and chain of custody due diligence, independent audit and Conflict Minerals Report requirements set forth in Item 1.01(c) of Form SD. The Division's newly-adopted stance is a reaction to the April 3, 2017 decision of the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. District Court") reaffirming its prior holding (discussed in more detail here) regarding the constitutionality of Section 1502 of the Dodd-Frank Act, which serves as the impetus for the conflict minerals rules. The D.C. District Court held that Section 1502 violates the First Amendment to the extent that it compels companies to disclose that their products "have not been found to be 'DRC-conflict free.'"
SEC Acting Chair Michael S. Piwowar explained the Division's decision with the following statement: "The primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional. In light of the foregoing regulatory 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."
Importantly, the Division’s statements did not address enforcement of Items 1.01(a) and 1.01(b) of Form SD. This means that public companies subject to the conflict minerals disclosure requirements must still conduct a reasonable country of origin inquiry and file a Form SD. Generally, Item 1.01(a) requires public companies that manufacture products containing (i) gold (ii) cassiterite (tin), (iii) columbite-tantalite, (iv) wolframite (tungsten), or (v) derivatives of any of these minerals to conduct a good faith country of origin inquiry reasonably designed to determine whether any of those minerals originated in the Democratic Republic of the Congo or an adjoining country (collectively, the "DRC"), or are from recycled or scrap sources. Item 1.01(b) requires companies that are able to conclude based on this inquiry that their conflict minerals originated outside of the DRC or from recycled or scrap sources to include "Conflict Minerals Disclosure" in their Form SD filings and websites briefly describing the country of origin inquiry and its results. Item 1.01(c) applies to companies whose products “have not been found to be DRC-conflict free’,” requiring companies in that case to conduct the source and chain of custody due diligence, obtain an audit of that due diligence and include a Conflict Minerals Report as an exhibit to their Form SDs (and provided related website disclosure). If a public company that is subject to the conflict minerals disclosure requirements chooses not to comply with Item 1.01(c) in light of the Division’s position, we expect that the company would still describe its reasonable country of origin inquiry under “Conflict Minerals Disclosure” in its Form SD filing and on its website, regardless of the results of that inquiry.
While the Division's guidance indicates that it will not recommend enforcement actions for failure to comply with Item 1.01(c), companies should note that a Form SD is considered “filed,” rather than simply “furnished,” under the Exchange Act, which could subject a company to a private right of action under Section 18 of the Exchange Act for failure to file the Item 1.01(c) information. In addition, companies will want to consider the scope of disclosure that they may want to voluntarily provide to their stakeholders, notwithstanding the Division’s guidance on Item 1.01(c). The deadline to file a Form SD for the 2016 reporting year is May 31, 2017.
The House Financial Services Committee is set to unveil an updated version of the Financial CHOICE Act (“CHOICE Act 2.0”) in the coming weeks. A discussion draft released on April 19 suggests that CHOICE Act 2.0 will require policymakers to study the benefits of regulations versus their costs. Ultimately, this directive may result in further revisions to the conflict minerals rules.