SEC Issues Guidance on Conflict Minerals Reporting (with Woody and Lofchie Comments)
On April 29, 2014, the Director of the Division of Corporation Finance issued a much-anticipated statement regarding the SEC's conflict minerals reporting requirements. Two weeks ago, the United States Court of Appeals for the District of Columbia Circuit held that portions of the SEC's conflict minerals rule violated the First Amendment by requiring companies to describe their products as having "not been found to be DRC conflict free." Since that decision, the SEC has faced significant pressure from opposite directions regarding the implementation of the rule. On April 21, 2014, twelve lawmakers in favor of moving forward quickly wrote a letter to SEC Chair White urging the agency to implement the rule in accordance with the original timeline. On April 28, 2014, two SEC Commissioners in favor of waiting for further legal resolution issued a Joint Statement calling for a stay of the rule's implementation and for the judicial rejection of the rule in its entirety.
The April 29, 2014, statement by the Director of Corporation Finance clarified that companies are expected to file their reports, in accordance with those portions of the rule that were upheld by the D.C. Circuit, by the original deadline of June 2, 2014. Pursuant to the rule, companies that are required to file a Form SD must describe their reasonable country of origin inquiries. Companies that, after conducting their reasonable country of origin inquiries, are also required to file a Conflict Minerals Report must describe the due diligence undertaken. In accordance with the D.C. Circuit ruling, no company is required to describe its products as "DRC conflict free," having "not been found to be 'DRC conflict free,'" or "DRC conflict undeterminable." However, if a company has products that previously would have been categorized as "DRC conflict undeterminable" or "not found to be 'DRC conflict free,'" it must state in its Conflict Minerals Report that the facilities used to produce the minerals, the country of origin of the minerals and the efforts made to determine the relevant mine or location of the minerals' origin.
A company may elect voluntarily to describe its products as "DRC conflict free" in its Conflict Minerals Report. However, if a company chooses to do so, it must obtain an independent private sector audit of the Conflict Minerals Report. Otherwise, no independent private sector audits of Conflict Mineral Reports will be required.
Woody Comment: The SEC's four-paragraph statement of guidance demonstrates that the agency considers the rule to be largely intact after the D.C. Circuit ruling. In addition, the guidance demonstrates the agency's position that the First Amendment concerns implicated by the rule are easily remedied by removing the requirement that companies describe their products as "DRC conflict free," having "not been found to be 'DRC conflict free,'" or "DRC conflict undeterminable." However, the April 29 guidance likely will not be the last word from the agency on its conflict minerals rule. The same day that the guidance was issued, petitioners in the litigation related to the rule filed with the SEC a Motion for a Stay of the entire rule. Additionally, litigation over the rule continues in the United States District Court for the District of Columbia Circuit. Although the deadline looms for complying with the rule, the final form of the rule itself may still remain in flux.
Lofchie Comment: The rules relating to conflict minerals are perhaps the most egregious example of the Securities Exchange Act's requirements being used for purposes that have nothing whatsoever to do with the purposes of the statute; i.e., the protection of investors and the support of the economy. In fact, the various requirements serve as a drag on companies and the economy. While it is possible this could be justified as a feel-good measure if there were some consensus that the requirements served a material humanitarian interest, there continues to be significant debate on this score, and arguments that the requirements, however well intended, do more harm than good. Against that background, and considering that two of the SEC Commissioners have argued that the law in its entirety should be vacated by the courts, it is disappointing that the SEC is determined to proceed with enforcement of the law rather than wait for ultimate judicial resolution of the constitutionality of the requirements.
See: Director Higgins' Statement.
Related news: SEC Chair White: Conflict Minerals Rule Will Not Be Delayed (with Woody Comment) (April 29, 2014); Two SEC Commissioners Call for Rejection of Conflict Minerals Rule (with Woody Comment) (April 28, 2014); D.C. Circuit Strikes down Part of SEC's Conflict Minerals Rule (with Woody Comment) (April 14, 2014); SEC Updates FAQs Regarding Conflict Minerals (April 7, 2014).
For our complete library of conflict minerals materials, please see the Cabinet Conflict Minerals page.