On August 18, 2015, the U.S. Court of Appeals for the District of Columbia Circuit held that the Dodd-Frank rule that requires public companies to investigate and disclose the origin of certain minerals (conflict minerals) found in the Democratic Republic of the Congo (DRC) and countries bordering the DRC violates the U.S. Constitution’s protection of free speech under the First Amendment. Specifically, to the extent that the statute and rule require regulated entities to report to the U.S. Securities and Exchange Commission (SEC) and to state on their website that any of their products have not been found to be “DRC conflict-free,” the Court found that this “compelled speech” was a violation of this constitutional protection. On April 3, 2017, the U.S. District Court for the District of Columbia entered final judgment in the case and remanded to the SEC for final rulemaking.

On April 7, 2017, Michael Piwowar, the SEC’s Acting Chairman, issued a public statement addressing the final judgment and noted that the Court of Appeals left open the question whether this description is required by statute or, rather, is solely a product of the SEC’s rulemaking. He instructed the staff of the SEC to determine how to address the Court of Appeals decision – including whether Congress’s intent could be achieved through a descriptor that avoided the constitutional defect identified by the Court – and how that determination could affect overall implementation of the conflict minerals rule.

Significantly, he also noted that, because the primary function of the extensive 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 (including the Conflict Minerals Report audit requirement) is to enable companies to make the “DRC conflict-free” disclosure found to be unconstitutional, “it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.”

In a statement issued on the same day, the staff of the SEC Division of Corporate Finance acknowledged the Acting Chairman’s statement and noted that it has determined that it will not recommend enforcement action if companies only file disclosure on Form SD under the provisions of the rule requiring a reasonable country of origin inquiry. This enforcement position applies equally to those issuers that are required, under the rule, to conduct due diligence on the source and chain of custody of their conflict minerals.

As a result, issuers covered by the rule are currently required only to perform in good faith a “reasonable country of origin” inquiry to determine the origin of their conflict minerals. The inquiry should be reasonably designed to determine whether any conflict minerals originated in the covered countries under the rule or are from recycled or scrap sources. On the basis of this inquiry, if an issuer (i) determines that its necessary conflict minerals did not originate in the covered countries or did come from scrap or recycled sources or (ii) has no reason to believe that its necessary conflict minerals may have originated in the covered countries or reasonably believes that its necessary conflict minerals did come from scrap or recycled sources, then the issuer should file with the SEC a specialized disclosure report on Form SD that discloses that determination, with a brief description of the inquiry it undertook in making its determination and the results of that inquiry. This information must also be disclosed on the issuer’s website.

Even if, following such inquiry, an issuer either (i) knows that its conflict minerals originated in the covered countries and did not come from recycled or scrap sources or (ii) has reason to believe that its conflict minerals may have originated in the covered countries and may not have come from scrap or recycled sources, the issuer need not perform any due diligence on the source and chain of custody of its conflict minerals and need not prepare or file a specialized disclosure report on Form SD.