It remains to be seen whether recent developments will ease corporate confusion, or add to dilemmas. With little more than a month to go before this year’s conflict minerals disclosures, the Securities and Exchange Commission has thrown a curveball.
In response to a now-settled lawsuit, Acting Chairman Michael Piwowar, on April 7, announced an easing of the Commission’s enforcement posture regarding the rule while the Commission rethinks the regulation.
The conflict minerals rule, issued by the SEC in August 2012, requires companies to disclose information each calendar year on the source of tantalum, tin, gold, and tungsten used in their products. Those minerals are known to have funded violent conflict in the DRC and adjoining countries. Companies were required to conduct a “reasonable” country-of-origin inquiry to determine if the minerals originated from the covered countries; track and document the source and chain of custody; and include findings in a public report. When asserting themselves to be “DRC conflict free,” registrants must submit an independent audit to verify the determination.
A lawsuit brought against the rule by the National Association of Manufacturers, U.S. Chamber of Commerce, and the Business Roundtable was resolved in November 2015 when the U.S. Court of Appeals for the D.C. Circuit concurred with a lower court ruling that certain disclosure aspects of the rule are unconstitutional. Specifically, the Court took issue with disclosures and audits that would force companies, in a perceived violation of free speech protections, to declare whether their products do or don’t use the spotlighted Congolese minerals.
The Court agreed with that argument and the case was remanded back to the U.S. District Court for “further proceedings.”
The SEC declined an opportunity to petition the Supreme Court for a review of the appellate court’s decision, choosing instead to maintain post-lawsuit guidance that sill required Form SD disclosures and supply chain due diligence, but no longer demanded a declarative admission of conflict minerals use. The deadline for annual filings was, and remains, May 31.
On April 3, 2017, the U.S. District Court for the District of Columbia entered final judgment in the case. “Pursuant to the Administrative Procedure Act, the Court holds unlawful and sets aside the Rule, only to the extent that it requires regulated entities to report to the Commission and to state on their websites that any of their products “have not been found to be ‘DRC conflict free,’” it wrote.
The Court remanded rulemaking back to the SEC. It was left to the Commission to determine whether the unconstitutional aspects of the rule can be resolved via additional guidance, re-proposed regulations, or vacating the rule in its entirety.
“The Court’s remand has now presented significant issues for the Commission to address,”the Division of Corporation Finance wrote in an April 7 statement, responding to the lower court’s ruling. “At the direction of the Acting Chairman, we have considered those issues. In light of the uncertainty regarding how the Commission will resolve those issues and related issues raised by commenters, the Division 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,” CorpFin added.
Companies with questions about the content of Form SD and the Conflict Minerals Report should contact CorpFin.
“The Commission will now be called upon to determine how to address the Court of Appeals decision, including whether Congress’s intent…can be achieved through a descriptor that avoids the constitutional defect identified by the court, and how that determination affects overall implementation of the Conflict Minerals rule,” Piwowar wrote in an April 7 statement.
Piwowar instructed staff to begin work on a recommendation for future Commission action. On Jan. 31, he directed SEC staff to reconsider whether the guidance is still appropriate and whether any additional relief is appropriate. As part of that process, he launched a recently completed public consultation. Those public comments may guide the Commission’s deliberations regarding the rule.
Also in play: the State Department recently began a public consultation process of its own, seeking comments on “how best to support responsible sourcing of conflict minerals.” The consultation is open through April 28.
“The primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals … is to enable companies to make the disclosure found to be unconstitutional,” Piwowar wrote. “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.”
The latest news was not at all welcomed by advocates of the rule.
“One commissioner doesn't have the authority to change the conflict minerals law or regulation unilaterally,” says Sasha Lezhnev, associate director of policy for the non-profit Enough Project. “Companies are still legally required to file conflict minerals reports and disclose their due diligence, according to the law that Congress passed and the SEC rule that the courts upheld. We look forward to reading companies' full conflict minerals reports in May.”