SEC Relaxes Conflict Minerals Reporting
Effective immediately, the Securities and Exchange Commission (SEC) staff will no longer enforce contentious aspects of conflict minerals reporting requirements of public companies. The change was triggered by the final judgment in the conflict minerals case by the U.S. District Court for the District of Columbia on April 3, 2017.
The SEC staff took the action because of uncertainties surrounding the constitutionality of Item 1.01(c) of Form SD (as required under Rule 13p-1 of the Exchange Act). Item 1.01(c) of Form SD requires a public company to conduct detailed and costly due diligence on its supply chain if a less costly, reasonable country of origin inquiry determines that "the registrant knows that any of its necessary conflict minerals originated in the Democratic Republic of the Congo or an adjoining country and are not from recycled or scrap sources, or has reason to believe that its necessary conflict minerals may have originated in the Democratic Republic of the Congo or an adjoining country and has reason to believe that they may not be from recycled or scrap sources."
Specifically, the U.S. Court of Appeals for the District of Columbia Circuit had previously found that the conflict minerals rule "violate[s] the First Amendment to the extent 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." ' " Under the staff's new guidance, compliance with Item 1.01(c) reporting will no longer be enforced.
[T]he 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. This statement is subject to any further action that may be taken by the Commission, expresses the Division’s position on enforcement action only, and does not express any legal conclusion on the rule.
SEC Acting Chairman Michael S. Piwowar explained the rationale for the staff position:
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.
Required Conflicts Minerals Reporting Going Forward
As noted, public companies subject to the conflict minerals reporting requirements must continue to conduct a reasonable country of origin inquiry and file a Form SD. In most circumstances, Item 1.01(a) of Form SD requires public companies to conduct in good faith a reasonable country of origin inquiry regarding those conflict minerals that are reasonably designed to determine whether any of the conflict minerals originated in the Democratic Republic of the Congo or an adjoining country, or are from recycled or scrap sources.
In addition, Item 1.01(b) of Form SD continues to require public companies to report the following:
Based on its reasonable country of origin inquiry, if the registrant determines that its necessary conflict minerals did not originate in the Democratic Republic of the Congo or an adjoining country or did come from recycled or scrap sources, or if it has no reason to believe that its necessary conflict minerals may have originated in the Democratic Republic of the Congo or an adjoining country, or if based on its reasonable country of origin inquiry the registrant reasonably believes that its necessary conflict minerals did come from recycled or scrap sources, the registrant must, in the body of its specialized disclosure report under a separate heading entitled "Conflict Minerals Disclosure," disclose its determination and briefly describe the reasonable country of origin inquiry it undertook in making its determination and the results of the inquiry it performed. Also, the registrant must disclose this information on its publicly available Internet website and, under a separate heading in its specialized disclosure report entitled "Conflict Minerals Disclosure," provide a link to that website.
Public companies required to conduct due diligence under Item 1.01(c) should determine whether it is beneficial to complete the due diligence and report in accordance with past practices or to cease due diligence. When making this determination, public companies should consider requirements of their customers to maintain a socially-responsible supply chain and the benefit of maintaining relations with other stakeholders in this area.
Any company that completes questionnaires or other due diligence at the request of its suppliers should check with the relevant supplier before ceasing efforts. Questionnaires are generally part of the "reasonable country of origin inquiry" which will continue under the SEC's new guidance. In addition, as noted above, some public companies are likely to continue the due diligence required by Item 1.01(c) and will look to their suppliers to support this effort.