It has been an eventful week for those following the conflict minerals rules in the news. The United States District Court for the District of Columbia issued final judgment in the long-running conflicts minerals litigation (detailed here) and, following a statement by Acting Chairman Piwowar, the Division of Corporation Finance has issued a blanket statement that it will not recommend enforcement of some of the most burdensome requirements of the rules (available here).

Final Court Decision

On April 3, 2017, the D.C. District Court entered final judgment in National Association of Manufacturer’s et al. v. SEC et al. Consistent with prior rulings, the District Court held that Section 1502 of the Dodd-Frank Act, which mandated the adoption of the conflict mineral rules, and Exchange Act Rule 13p-1 and Form SD adopted thereunder, violate the First Amendment to the extent that they compel companies to disclose on their websites that any of their products “have not been found to be ‘DRC-conflict free.’” The decision, however, left the other requirements of the conflicts minerals rules in place. The District Court remanded to the Commission to take action in accordance with its decision.

Statements by the Acting Chairman and Corporation Finance No-Action Position

On April 7, 2017, in response to the District Court’s final judgment, the Commission’s Acting Chairman, Michael Piwowar, issued a public statement on the issue (available here). Piwowar noted that the Court of Appeals left it to the Commission to determine how to address the Court’s decision – specifically, whether Congress’s intent in the portion of Section 13(p)(1) that the Court deemed unconstitutional can be achieved through a means that does not infringe on companies’ First Amendment rights, and how the Court’s determination affects the conflicts minerals rules overall.

Piwowar noted that he has instructed the Commission’s Staff to begin working on a recommendation for future Commission action. In the meantime, Piwowar explained that the requirements listed in Item 1.01(c) of Form SD (including requirements for due diligence on the source and chain of custody of conflict minerals and an associated independent private sector audit (IPSA)), considered among the most onerous and expensive requirements of the conflicts minerals requirements, are not likely to be enforced until a final resolution is arrived upon by the Commission. Piwowar stated that the primary function of these requirements “is to enable companies to make the disclosure found to be unconstitutional.” As a result, Piwowar explained, “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.”

Shortly after Piwowar’s statement, the Division of Corporation Finance issued blanket no-action relief, explaining that “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.”

Analysis

Piwowar’s statement and the Division’s blanket no-action statement go significantly further in providing relief from the conflict mineral rules than earlier interim guidance issued by the Division of Corporation Finance after the courts first found the conflict mineral rules unconstitutional (available here), which has been effective for the last three years. The prior guidance explained that companies were not required to affirmatively describe their products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict indeterminable” and were therefore not required to obtain an IPSA unless they voluntarily identified any of their products as “conflict free.” The Division’s updated guidance, rather than only suspending the requirement to identify the conflict status of the product, means that companies with conflict minerals that are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company need only conduct in good faith a reasonable country of origin inquiry (RCOI) regarding those conflict minerals, as required by Item 1.01(a), and file a Form SD, as required by Rule 13p-1.

For most companies, the content of the Form SD is unclear if the company wishes to rely on the no-action position. Only a small number of reporting companies are subject to the disclosure requirements under Item 1.01(b) of Form SD. That provision states that if a company concludes that its conflict minerals do not come from a covered country or come from recycled or scrap sources, the company must disclose that conclusion in its Form SD and on its website, and must describe its RCOI. Most companies that have been filing Form SD have been reporting under Item 1.01(c), which is subject to the Division’s no-action relief. That provision states that if a company, based on its RCOI, knows or has reason to believe that its conflict minerals may have originated in a covered country and are not from recycled or scrap sources, the company must (1) conduct due diligence on the source and chain of custody of its conflict mineral, including an IPSA, and describe the due diligence in the conflict mineral report attached to its Form SD, and (2) describe their products that contain necessary conflict minerals, the facilities used to process the necessary conflict minerals in those products, the country of origin of the necessary conflict minerals in those products, and the efforts to determine the mine or location of origin with the greatest possible specificity.

Impact on 2017 Form SDs

As noted above, compliance with Rule 13p-1 (which requires the filing of a Form SD) and with Item 1.01(a) of Form SD (which requires companies subject to the conflict minerals rules to conduct a RCOI and determine whether they have reason to believe they sourced tin, tantalum, tungsten or gold (3TG) from the covered countries) are not affected by Piwowar’s and the Division’s statements. As well, some companies may have to provide the disclosure described above to the extent that Item 1.01(b) applies to them.

Most companies, which otherwise would be reporting under Item 1.01(c), will have to decide whether to prepare a conflict mineral report and what to say in it or in their Form SD. Given that we are only a few weeks from the May 31 deadline to file Form SD, we expect that many companies have already conducted the due diligence required by Item 1.01(c) and may even have substantially completed drafting the report, and therefore will prepare and file a conflict mineral report similar to what they did in 2016. Other companies may choose to pare back their disclosures in reliance on the Division’s no-action relief, such as by filing a Form SD that only includes a determination of whether they have reason to believe that they sourced 3TG from the covered countries and a description of and the results of their RCOI, rather than also attaching a conflict minerals report that discusses, in detail, the conflicts minerals program and results of the due diligence conducted as required by Item 1.01(c).

When determining what to report on their Form SD, companies should consider potential reactions of an abbreviated report from some shareholders or from consumers. Companies should also be mindful that the statements by Piwowar and the Division do not change the underlying rules themselves and are not controlling on the courts, but only address the Division’s current approach to enforcement, and that the adopting release for the conflict mineral rules suggest that the rules are enforceable in private actions under Section 18 of the of the Exchange Act. Finally, any company that voluntarily chooses to describe any product as “conflict free” should consider conducting and perhaps disclosing an IPSA to support the basis for its conclusion.

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