On April 7, 2017, the SEC’s Division of Corporation Finance and Acting Chairman Michael S. Piwowar issued statements providing updated guidance regarding implementation of the Conflict Minerals rule (Section 13(p)(1) of the Securities Exchange Act and Rule 13p-1 thereunder).1 Importantly, the Division of Corporation Finance determined, in what is effectively a blanket “no-action letter,” that it will not recommend enforcement action if issuers subject to the Conflict Minerals rule only perform a reasonable country of origin inquiry and provide disclosure as prescribed in Item 1.01(a) and (b) of Form SD without the detailed supply chain due diligence disclosure, Conflict Minerals Report or independent private sector audit outlined in Item 1.01(c) of Form SD, notwithstanding the applicability of Item 1.01(c) to any particular issuer.
The statements follow the final judgment entered in National Association of Manufacturers, et al. v. Securities and Exchange Commission by the U.S. District Court for the District of Columbia on April 3, 2017, in which the court held that the Conflict Minerals rule violated the First Amendment right of free speech to the extent that it compelled an issuer to report to the SEC and post on its website that its products “have not been found to be ‘DRC conflict free.’” 2 In its ruling, the district court remanded to the SEC and left open the question of whether such description is required by statute or is a product of SEC rulemaking. The April 3rd judgment concludes a lengthy litigation upon which we had previously reported in July 2013, April 2014 and August 2015. 3
In response to the ruling, Acting Chairman Piwowar issued a statement indicating that he had instructed the SEC Staff to begin work on a recommendation to address the district court’s decision, with particular focus paid on whether the constitutional defect identified by the court could be addressed through the use of another “descriptor,” and taking into account public comments received in response to the SEC’s January 31, 2017 request for comment. With respect to the SEC’s blanket no-action relief, Acting Chairman Piwowar explained that the primary function of the extensive and costly requirements set forth in Item 1.01(c) of Form SD was to enable companies to make the disclosure that was found to be unconstitutional and that, in light of the district court’s decision and regulatory uncertainties, “it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.”
The SEC’s no-action relief will be immediately effective for issuers subject to the Conflict Minerals rule and will apply to Form SD filings for calendar year 2016 due on May 31, 2017. While issuer’s may take comfort in the SEC’s no-action position, it is important to note that the Staff’s position is with respect to enforcement action only. In considering whether or not to include Item 1.01(c) information in Form SD, issuers should also consider that Form SD is considered to be “filed” (not “furnished”) under the Exchange Act, and thereby subject to potential private rights of action under Section 18 of the Exchange Act. Furthermore, issuers may want to take into account the potential concerns of customers, investors and other stakeholders in deciding what information to include in their Form SD disclosure.