In April 2014, the Court of Appeals for the D.C. Circuit in
National Association of Manufacturers v. SEC held that the
conflict minerals rule's requirement that companies state that
their products have not been found to be "DRC conflict
free" violated the First Amendment. Subsequently, the SEC
staff released guidance relieving issuers of the obligation to
put those labels in their reports. The case was subsequently
remanded to the district court for further consideration, and on
August 18, 2015, the Court of Appeals reaffirmed its prior
In response to these developments, Acting SEC Chairman Michael
S. Piwowar issued a statement in January 2017 declaring that he had
"directed the staff to reconsider whether the 2014 guidance on
the conflict minerals rule is still appropriate and whether any
additional relief is appropriate." (See this Doug's Note.)
Last week, the D.C. Circuit Court entered final judgment in the
case, which upheld its prior rulings, and remanded it to the SEC
for appropriate action.
This past Friday, the SEC issued a statement noting that the D.C. Circuit's
remand to the SEC has "presented significant issues for the
Commission to address" and that several comments were received
in response to Acting Chairman Piwowar's January request.
Therefore, "in light of the uncertainty regarding how the
Commission will resolve those issues," the Division of
Corporation Finance will not recommend enforcement action if
companies "only file disclosure under the provisions of
paragraphs (a) and (b) of Item 1.01 of Form SD," which
conspicuously excludes the need to comply with paragraph (c).
What does this mean?
Companies that use conflict minerals that are necessary to the
functionality or production of products manufactured (or contracted
to be manufactured) still must comply with Item 1.01(a), which
requires that they:
conduct a good faith reasonable
country of origin inquiry (RCOI), and
file a Form SD with the SEC not later
than May 31st.
Companies that conclude that their conflict minerals do not come
from a covered country (or come from recycled or scrap materials)
still must comply with the Item 1.01(b) requirement to disclose
that conclusion on Form SD and on its website.
Paragraph (c) of Item 1.01, on the other hand, relates to the
requirement to conduct due diligence on the source and chain of
custody of conflict minerals and the need for a related independent
private sector audit. If a company's RCOI gives it reason to
believe that its conflict minerals may have originated in a covered
country (and are not from recycled or scrap materials), then it
must conduct due diligence on the chain of custody and describe
those efforts in a report attached to Form SD.
By eliminating the need to comply with Item 1.01(c), the SEC is
saying that companies with conflict minerals do not have to:
trace the smelters or refiners used
provide the related chain of custody
have such disclosures audited by a
What should you do?
The Form SD filing deadline is only seven weeks away, and most
companies are well into their annual chain of custody diligence and
related disclosure drafting. Because most of the work is already
done, the question becomes whether to scale back or eliminate
processes and disclosures in light of these developments.
Before rushing to do so, remember that many company
stakeholders, including customers, consumer groups and research
firms, employees, non-governmental organizations and socially
responsible investors, will continue to scrutinize conflict
minerals compliance and disclosure when evaluating a company's
overall corporate social responsibility performance. Therefore,
companies should consider their key stakeholders and what message
they are trying to send.
Furthermore, the SEC's statements address only the absence
of that agency's intention to bring enforcement actions. They
do not control whether a court considering a private action might
otherwise conclude that failure to comply with Item 1.01(c)
violates applicable law.
Stay tuned. No doubt there's more to come.
This Client Alert is intended to inform readers of recent
developments in the field of corporate law. It should not be
considered as providing conclusive answers to specific legal
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