Snell & Wilmer
Corporate Communicator
 

Editor
Jeffrey E. Beck
602.382.6316
jbeck@swlaw.com
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Author 
Cheryl A. Ikegami
602.382.6395
cikegami@swlaw.com
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Snell & Wilmer
Past Issues

Summer 2017

Recent Developments with Respect to Conflict Minerals

by Cheryl A. Ikegami

In the Spring 2017 issue of our Corporate Communicator, we included a brief discussion of the status of the conflict minerals rules contained in Rule 13p-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the related Form SD (the “Rules”). The Rules implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). We noted that in litigation challenging the Rules brought by the National Association of Manufacturers, Chamber of Commerce of the United States of America and Business Roundtable (the “Litigation”), the Court of Appeals for the District of Columbia Circuit held that the Rules violated the First Amendment to the extent that they require companies to state in filings with the Securities and Exchange Commission (“SEC”) and on their websites that any of their products have “not been found to be ‘DRC conflict free.’” We noted that the SEC had declined to appeal that decision to the U.S. Supreme Court and the case had been remanded to the U.S. District Court for the District of Columbia for further proceedings.

On April 3, 2017, the District Court entered final judgment in the matter and remanded to the SEC to take further action on the Rules in light of the Court’s decision. The SEC will need to resolve what portion of the Rules should survive this ruling and otherwise how Congressional intent per Section 1502 of Dodd-Frank and Section 13(p) of the Exchange Act can be implemented, if at all, in light of this ruling.

On April 7, 2017, the SEC Division of Corporation Finance (the “Division”) issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule (the “April 2017 Statement”), noting that in light of uncertainties under the Rules resulting from the resolution of the Litigation, the Division has determined that it will not recommend enforcement action to the SEC if companies only file disclosure under paragraphs (a) and (b) of Item 1.01 of Form SD, even if they are otherwise subject to paragraph (c) of Item 1.01 of Form SD. In other words, the Division effectively sanctioned (from an enforcement standpoint) the omission of any required conflicts minerals report under paragraph (c) of Item 1.01, if a Form SD is filed that contains required disclosure regarding the reasonable country of origin inquiry and other matters required by paragraphs (a) and (b) of Item 1.01.[1] The April 2017 Statement added that it only expressed a position on enforcement and did not purport to express any legal conclusion on the Rules.

Also on April 3, 2017, Acting SEC Chairman Michael Piwowar issued a public statement expressing his view that the primary function of the diligence on the source and supply chain of companies’ conflict minerals required by paragraph (c) of Item 1.01 of Form SD is to enable such companies to make the assertion, found to be unconstitutional, as to whether such products have been found to be DRC conflict free, and that in light of the existing regulatory uncertainties, “it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.”

Response to the April 2017 Statement by a number of interested parties was swift and negative, challenging the actions as without authority and as an unwarranted de facto amendment of the Rules, and noting that companies are still legally required to file their conflict minerals reports and make the required disclosures regarding their supply chain due diligence efforts.

In determining whether to rely on the guidance in the April 2017 Statement for their 2017 filings, companies had to consider that the April 2017 Statement did not eliminate the Rules or bind any court. Nor did it eliminate the possibility of a private right of action on the Rules under Section 18 of the Exchange Act for misleading statements in the Form SD. In addition, many companies are considering the views and expectations of consumers, shareholders and customers, some of whom may be strong advocates of the Rules.

This was the state of SEC guidance on the Rules and public reaction when company 2017 filings were made under the Rules; such filings were required to be made by May 31, 2017. As such filings are reviewed and analyzed, it will be interesting to see what impact the April 2017 Statement actually had on company disclosures. We believe that due to the timing of the April 2017 Statement, and ambiguities and uncertainties inherent in its guidance, many if not most companies continued to file conflict minerals reports under Item 1.01(c) of Form SD as in prior years. We expect, however, that by the time filings are due in 2018, there will be significant additional clarity on the status and requirements of the conflict minerals Rules.

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Notes:

[1] Item 1.01(a) of Form SD requires a reasonable country of origin inquiry (“RCOI”) if conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the filing company. Paragraph (b) of Item 1.01 requires certain disclosures if, based on the RCOI, the company determines that its necessary conflict minerals did not originate in the DRC region 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 DRC region or reasonably believes that its necessary conflict minerals did come from recycled or scrap sources. If a company cannot make such determinations, it must exercise due diligence on the source and chain of custody of its conflict minerals and make additional disclosures, including possibly filing a conflict minerals report, under Item 1.01(c) of Form SD. [back]

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