SEC’s Division of Corporate Finance Issues Statement on Conflict Minerals Disclosure Requirements
Ruling & Enforcement: Conflict Minerals’ Disclosure
On April 3, 2017, the U.S. District Court for the District of Columbia entered a final judgment in favor of the National Association of Manufacturers, declaring that certain requirements of Section 1502 of the Dodd-Frank Act, along with Rule 13p-1 of the Securities Exchange Act of 1934 (the Exchange Act) and Form SD, violate the First Amendment to the extent that they require companies to explicitly state in reports to the Securities and Exchange Commission and on their websites that their products have not been found to be “DRC conflict free.” The ruling directly affects disclosures required under Item 1.01(c) of Form SD, which requires companies to conduct extensive chain of custody due diligence “if 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.”
On April 7, 2017, the Securities and Exchange Commission issued a response to the District Court’s ruling in which they indicated that, in light of the uncertainty regarding how the Commission will resolve those issues and related issues raised by commenters, it has determined that it will not recommend enforcement action to the extent that companies only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD.
Compliance with the Law
The Commission’s response will permit companies to forego compliance with Item 1.01(c) without concern of Commission enforcement. Many companies have historically reported under 1.01(c) of Form SD with respect to Conflict Minerals, and this no action relief will allow those companies to exercise discretion to opt out of Item 1.01(c)’s extensive disclosure requirements and abstain from conflict mineral chain of custody due diligence investigations. However, it is important to note that neither the District Court ruling nor the Commission’s statements relieve companies from their reporting obligations under 1.01(a) of Form SD, which requires a company to perform a reasonable country of origin inquiry to determine if certain raw materials used in the company’s supply chain were sourced in the countries covered by the statute/regulations, or Item 1.01(b) of Form SD, which requires disclosure of due diligence efforts resulting in a determination that raw materials did not originate from the covered countries, should it make such a determination (though only a small minority of companies have historically been able to make such a determination and report under 1.01(b)).
2017 Filing Impact
Companies will still be required to file Form SD for fiscal 2016 by May 31, 2017 and, as discussed above, the filing must still contain the disclosures required by Item 1.01(a) and, if applicable, Item 1.01(b) of Form SD. However, the disclosures required by Item 1.01(c) of Form SD and the “Conflict Minerals Report,” often required to be filed as an exhibit thereto, may be omitted this year without concern of Commission enforcement. Given that these turn of events occurred less than two months prior to the annual filing deadline, many companies may have already substantially completed their due diligence investigations concerning chain of custody per the requirements of Item1.01(c), and thus may choose to prepare their Form SD and Conflict Minerals Report filings consistent with prior years, notwithstanding the Commission’s recent statements.
It is also worth noting that the Commission’s statements are limited to enforcement actions by the Commission; since Form SD is filed, rather than “furnished” and there has been no change to the underlying rules or law, the filing remains subject to Section 18 of the Securities Exchange Act of 1934 and private rights of action. Additionally, companies should be mindful of how their customers and shareholders may react to an election to forego such disclosure.