SEC Releases Statement on the Conflict Minerals Rule following Court of Appeals Decision
April 30, 2014
Yesterday, the director of the SEC’s Division of Corporation Finance, Keith F. Higgins, released a statement addressing the effect on the SEC’s conflict minerals rule of the April 14, 2014 decision by the Court of Appeals for the District of Columbia Circuit.
The Dodd-Frank Act required the SEC to adopt a rule, now Rule 13p-1 under the Securities Exchange Act of 1934, requiring disclosures by a reporting company that manufactures or contracts to manufacture products for which conflict minerals are necessary to those products’ functionality or production. The appeals court, while rejecting all other challenges to Rule 13p-1, concluded that the statute and the rule violate the First Amendment to the extent that they may require an issuer to report to the SEC and state on its website that any of its products “have not been found to be ‘DRC conflict free.’” The appeals court remanded the case to the district court for further proceedings.
Since the remainder of the SEC’s rule was upheld and the appeals court had no First Amendment objection to any other aspects of Rule 13p-1, the statement indicates that the Division expects issuers required to file a Form SD under the rule will still do so on or before the due date of June 2, 2014, subject to the following guidance:
- An issuer is not required to identify any of its products with the descriptors “DRC Conflict Free,” “DRC conflict undeterminable” or “not found to be ‘DRC conflict free,’” but may voluntarily elect to do so.
- An issuer should make all other disclosures called for in the rule, including a description of its reasonable country of origin inquiry and, if required to attach a Conflict Minerals Report, a description of the due diligence it undertook.
- For any products that an issuer finds to be “DRC conflict undeterminable” or “not found to be ‘DRC conflict free’” in accordance with the rule and Form SD, while disclosures using these terms are not required, the issuer must still disclose the facilities used to produce the conflict minerals, the country of origin of the minerals and the efforts to determine the mine or location of origin.
- An independent private sector audit (IPSA) is no longer required unless an issuer voluntarily elects to describe any of its products as “DRC conflict free” in its Conflict Minerals Report. Form SD already includes an exemption from the IPSA requirement during the transition period (four years for smaller reporting companies and two years for all other issuers) for products an issuer finds to be “DRC conflict undeterminable.”
The Commission was apparently divided on how to respond to the Court of Appeals’ decision. On April 28, 2014, the day before the Division issued its statement, two commissioners released a joint statement advocating instead that the SEC stay the entire rule and any further regulatory obligations pending a decision by the district court.
The Division’s statement noted that the appeals court is unlikely to issue its mandate to the district court before the due date for Form SD filings. The timing of next steps in the legal proceedings is uncertain, and the statement notes that the guidance is subject to any subsequent SEC or court action.
We expect that most issuers required to file Form SD are in the final stages of drafting their disclosure, including the Conflict Minerals Report if required. In line with the Division’s guidance, issuers should plan to file Form SD and, if required, a Conflict Minerals Report by June 2, 2014.
The statement by the director of the SEC’s Division of Corporation Finance can be found here, and the appeals court’s decision is available here. For more information about the conflict minerals rule, see our Alert Memo dated September 12, 2012, available here, and our Alert Memos regarding the SEC’s FAQs dated May 31, 2013, available here, and April 8, 2014, available here.
Please feel free to call any of your regular contacts at the Firm or any of our partners and counsel listed under “Capital Markets” or “Corporate Governance” in the Practices section of the website if you have any questions.