by Cydney Posner
Today, in light of the entry of final judgment by the D.C. District Court in National Association of Manufacturers v. SEC, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule that provides substantial relief to companies subject to the rule. You may recall that, in that case, the Court held that a part of the conflict minerals rule violated the First Amendment. Corp Fin’s Updated Statement advises that companies will not face enforcement if they perform only a reasonable country-of-origin inquiry and file only a Form SD and do not conduct detailed supply-chain due diligence or prepare and file a conflict minerals report (Item 1.01(c) of Form SD) or have an audit performed — even if they would otherwise be required to do so under the rule. In a separate Statement, Acting SEC Chair Michael Piwowar commented that 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.”
In NAM v. SEC, the Court held that Section 1502 of Dodd-Frank and Rule 13p-1 and Form SD, Conflict Minerals, amounted to “compelled speech” in violation of companies’ First Amendment rights to the extent that the statute and the rule required companies to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’” In addition, the Court set the rule aside as unlawful, but only to the extent that it required regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’” (See this PubCo post. For more background on the case, see this PubCo post.) The matter was then remanded to the SEC. Corp Fin’s Updated Statement observes that the courts “left open the question of whether this description is required by the statute or, rather, is a product of the Commission’s rulemaking.” According to the Acting Chair’s Statement, the SEC “will now be called upon to determine how to address the Court of Appeals decision – including whether Congress’s intent in Section 13(p)(1) 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.”
In addition, Corp Fin’s Updated Statement notes that, in response to the invitation of the Acting Chair (see this PubCo post), the SEC has received a number of public comments requesting additional relief and further guidance on the rule. Piwowar indicates in his Statement that he has instructed the staff to work on a recommendation for future action, taking into account the public comments received. He also notes that “the Department of State has recently requested comment on how best to support the responsible sourcing of conflict minerals.” The action by the State Department could portend a serious reworking of the rule from a different perspective. (See this PubCo post.)
In conclusion, Corp Fin’s Updated Statement indicates that, as a result of the uncertainty of the SEC’s response to the various issues raised by the remand and by commenters, Corp Fin “has determined that it will not recommend enforcement… 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.” Accordingly, the Updated Statement provides that companies will not be subject to enforcement action if they perform only a reasonable country-of-origin inquiry and include that disclosure on a Form SD, but do not provide the disclosure that could otherwise be required in a Conflict Minerals Report or have an audit performed (unless, perhaps, they declare themselves to be conflict-free). Note, however, that it is not clear that companies are relieved from performing the more exhaustive due diligence inquiry into the source and chain of custody of their conflict minerals required under Item 1.01(c). The no-action relief is temporary, relates only to enforcement and does not otherwise attempt to address the underlying rule. (Note that, per CDI 12 of the conflict minerals CDIs, Form SD has no effect on Form S-3 eligibility, so failure to file a conflict minerals report with the Form SD should have no impact in that context.)
SideBar: Note that paragraph (b) of Item 1.01 addresses only the disclosure required when the company has no reason to believe that its conflict minerals may have originated in the DRC or other covered countries or where they are from scrap or recycled sources. Presumably, however, companies will still have to file Form SD where their conflict minerals may have originated from the DRC. Perhaps the staff will provide additional clarification as to the disclosure that will be expected in those and other circumstances.
According to Reuters, Piwowar’s action produced a real “backlash” from Commissioner Kara Stein, who “accused Piwowar of acting beyond his authority to gut the meat of a rule mandated by Congress, adopted by the SEC and reviewed by the courts. ‘It is unprecedented for one commissioner, acting alone and without official notice and comment, to engage in de facto rulemaking….It represents a troubling attack not only on the Commission process, but also on the restraints of government power.’”
For some reason, I don’t think we’ve heard the end of this story, so stay tuned….