A peek into Corp Fin’s assessment of the first year of conflict minerals filings

by Cydney Posner As those who worked on conflict minerals this past year can attest, the SEC was not exactly lavish in providing guidance on the application of its rules. As reported by Bloomberg, director of Corp Fin, Keith Higgins, speaking at the ABA meeting of the Business Law section in Chicago, did not stray from that practice. Higgins offered up only three observations gleaned from staff review of the first year of conflict minerals filings:

  • First, he stated that “some issuers conflated their reasonable country-of-origin inquiry (RCOI) with the due diligence requirements….’Sharpening up the precision’ with which issuers describe the RCOI process ‘would be one observation,’” the article reported. However, Higgins then “acknowledged that there could be an overlap in the RCOI and due diligence processes.” (Higgins is most likely referring to the fact that the OECD Guidance, which issuers must follow in performing due diligence, includes elements of RCOI, possibly leading to the problematic conflation.) Higgins noted “there is no requirement for issuers to perform an RCOI if they move directly on to the due diligence phase. ‘But if you determine that your conflict minerals didn’t come from’ the conflict region, ‘you should be providing clear and specific language about the process that you used to reach the determination,’ he said.”

    Soapbox: It’s difficult to discern exactly how the SEC would like issuers to “sharpen up the precision” in light of the process “overlap.” Most issuers performed an RCOI prior to due diligence. Is the intended take-away here that companies that performed due diligence should describe in their reports only the due diligence and not the RCOI that preceded it? Unclear. Just a suggestion, but it might help issuers to be more precise if the SEC provided guidance that harmonizes and clarifies the interaction of the OECD Guidance and the three-part framework of the SEC rules and advised issuers how to disclose elements of the OECD due diligence exercise that the SEC classifies as part of the RCOI.

  • Second, Higgins suggested that some issuers were obliquely conveying “that their products are conflict-free without expressly saying so. Companies that have not chosen to label their products as conflict-free should avoid disclosure that suggests so….” Under the Corp Fin Statement that was issued following the decision (described here) of the three-judge panel of the D.C. Circuit (which generally upheld the SEC’s rules, but concluded that the SEC requirement for companies to state that their products were not found to be “DRC conflict free” ran afoul of the First Amendment), issuers are not required to report their conclusions regarding conflict-free status.  However, if they do, they must provide an independent audit. (See this post.) Higgins continued that “‘Obviously, if you say your [product] is conflict-free, you have to provide an independent private sector audit, so nudging up close to that with some implied statement is probably not a good idea.’”
  • Third, Higgins observed that issuers are required to “disclose the smelter or refiner used to process their minerals, if such facilities are known,” even if they cannot determine whether the minerals used came from one of the DRC countries. The article reports that “about 75 percent of issuers did not provide in their conflict mineral disclosures any information about the smelters in their supply chains.” (Of course, many issuers were unable to determine which smelters or refiners were used to process the minerals that were included in the particular components in their products.)

When will we hear a more complete assessment from Corp Fin? According to the article, Higgins cautioned that Corp Fin “is unlikely to provide additional interpretive guidance regarding the conflict mineral requirements while the status of the rule remains uncertain due to pending litigation in the U.S. Court of Appeals for the District of Columbia.” (See this post.)

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