On April 3, 2017, the US District Court for the District of Columbia Circuit entered final judgment in Nat’l Ass’n of Mfrs., et al. v. SEC and remanded the case to the US Securities and Exchange Commission (SEC).1 In 2015, the US Court of Appeals for the District of Columbia Circuit had reaffirmed its 2014 holding that Section 13(p)(1) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 13p-1 “violate the First Amendment to the extent that the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free.”’”2
On April 7, 2017, Acting SEC Chairman Michael S. Piwowar issued a statement (April 7 Statement)3 in which he said that “the Commission is now called upon to determine how to address the Court of Appeals decision – including whether Congress’s intent in Section 13(p)(1) can be achieved through a descriptor that avoids the constitutional defect identified by the court – and how that determination affects the overall implementation of the conflict minerals rule.” He said that he has instructed the SEC’s staff to begin working on a recommendation for future SEC action. In formulating a recommendation, Acting Chairman Piwowar directed the staff to consider comments received in response to his statement of January 31, 20174 (which predates the entry of the final judgment in Nat’l Ass’n of Mfrs.) in which he directed the staff to consider whether the 2014 guidance on the conflict minerals rule5 was appropriate and whether any additional relief was appropriate, and invited public comment on the guidance and the rule implementation. The 2014 guidance requires companies to file Form SD on a timely basis, without including a statement as to the conflict-free status of the products that could be deemed to violate the First Amendment, and provides that no independent private sector audit (IPSA) would be required unless a company voluntarily elects to describe any of its products as “DRC conflict free” in its conflict minerals report.6
Acting Chairman Piwowar commented in his April 7 Statement that 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.”
Also on April 7, 2017, the SEC’s Division of Corporation Finance (Division) issued an updated statement (Updated Statement)7 in which it stated that the Court of Appeals “left open the question of whether this description is required by the statute or, rather, is a product of the commission’s rulemaking.” In the Updated Statement, the Division states that “in light of the uncertainty regarding how the Commission will resolve [the issues raised by the Court of Appeals] and related issues raised by commenters, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD.” Thus, companies will not be subject to enforcement action if they perform only a reasonable country-of-origin inquiry and include that disclosure on a Form SD but do not provide the disclosure that could otherwise be required in a conflict minerals report or have an audit performed or perform the due diligence inquiry into the source and chain of custody of their conflict minerals required under Item 1.01(c).
The Updated Statement is a no-action position. The Division noted that the Updated Statement is subject to further action that may be taken by the SEC, represents only the Division of Corporation Finance’s position on enforcement action and does not express any legal conclusions on the rule.
As companies subject to the conflict minerals disclosure rules have likely completed (or will soon complete) the source and chain-of-custody due diligence, depending on the outcome of the due diligence, some of them may choose to include the Item 1.01(c) disclosure to highlight their efforts in this area to (and possibly avoid criticism for omitting the disclosure from) investors, customers, non-governmental organizations, politicians and others who are interested in the sourcing of conflict minerals.
Neither the Updated Statement nor the April 7 Statement changed the staff’s 2014 guidance with respect to the IPSA requirement. Therefore, if a company chooses to include Item 1.01(c) disclosure in a Form SD, it will not need an IPSA as long as it does not describe its products as “DRC conflict free.”
Forms SD for calendar year 2016 are due on May 31, 2017.
Reuters has reported that the April 7 Statement and the Updated Statement have been criticized by Democratic SEC Commissioner Stein, who stated, “It is unprecedented for one commissioner, acting alone and without official notice and comment, to engage in de facto rulemaking . . . It represents a troubling attack not only on the Commission process, but also on the restraints of government power.”8 Some members of Congress have also questioned Acting Chairman Piwowar’s authority in earlier requesting comment on the staff’s 2014 guidance and the implementation of the conflict mineral rule. In addition, some non-governmental organizations have also issued statements questioning the authority for the positions taken by Acting Commissioner Piwowar and the Division and asking companies to ignore the Updated Guidance.9 On the other hand, elimination of Dodd-Frank’s conflict minerals statutory requirement has been raised as a possible effort for congressional action later this year. Therefore, conflict minerals disclosure is a subject that companies subject to the current rule should continue to monitor.