SEC issues new Conflict Minerals Guidance post NAM

May 2014 Authors: Marsha Z. Gerber, Cristina K. Lunders, Christian Menefee

Contacts

On April 29, 2014, the Securities and Exchange Commission (the "SEC" or the "Commission") issued additional guidance (“April 29 Guidance”) on the Conflict Minerals1 Rule (“The Rule”)2 following a US Court of Appeals for the DC Circuit decision in National Association of Manufacturers, et al., v. Securities and Exchange Commission (“NAM”),3 in which the court found unconstitutional the Rule’s requirement that Issuers4 report to the SEC and state on their website that their products have “not been found to be ‘DRC conflict free.’”

The April 29 Guidance amends some of the Rule’s due diligence and disclosure requirements and provides instruction on the practical implications of NAM as the filing deadline5 of June 2, 2014 approaches.6 On May 2, 2014, the SEC issued an order, consistent with NAM, staying the portion of the Rule that would require Issuers to label their products as having “not been found to be ‘DRC conflict free.’”7 Although the SEC stayed that portion of the Rule pending the completion of judicial review of NAM, the remainder of the Rule’s disclosures are not stayed.8 For a synopsis of the Rule as adopted, see our previous alert.

I. Events leading up to the April 29 Guidance

On April 14, 2014, the Rule was challenged in NAM, where the DC Circuit Court held that the Rule and corresponding statute are unconstitutional to the extent that they require Issuers to report to the SEC and state on their website that their products have “not been found to be ‘DRC conflict free.’”9 The court ruled that this labeling requirement essentially mandated that Issuers tell consumers that their products are “ethically tainted,” therefore conveying some responsibility for the war in the Democratic Republic of the Congo (“DRC”) and adjoining areas (“Covered Countries”), in violation of the First Amendment.10 After holding that Issuers no longer have to label their products as have “not been found to be ‘DRC conflict free,”’ the court remanded the case to the DC District Court for proceedings consistent with that holding.11

Because NAM did not address the labeling requirements for Issuers that label products as “DRC conflict free” or “DRC conflict undeterminable,” there was some confusion as to how Issuers with these products should proceed in their filings.

In the wake of NAM, SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar issued a joint statement asserting that the Rule should be stayed until the DC District Court opines on whether the Rule, in its entirety, is invalid under the First Amendment.12 The commissioners argued that the core purpose of the statute is the Rule’s requirement that products be labeled as “DRC conflict free,” “DRC undeterminable,” or have “not been found to be ‘DRC conflict free.’”13 Therefore, because the labeling requirements are at the heart of the Rule and corresponding statute, if the DC District Court were to find that all of the Rule’s labeling requirements are unconstitutional as conveying “ethical taint,” it may also find that the entire Rule is invalid.14

Contrary to the urging of SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar, on May 2, 2014, the SEC issued an order refusing to stay the entire Rule and only staying the portion of the Rule that would require Issuers to label their products as have “not been found to be ‘DRC conflict free.’”15

II. April 29 Guidance

The April 29 Guidance addresses what remains of the Rule’s disclosure requirements in light of NAM. Additionally, the April 29 Guidance sets forth changes in the Rule’s due diligence requirements, which were not vacated by the NAM court. Issuers must still file any reports required under the Rule on or before the June 2, 2014 deadline and in compliance with the sections of the Rule that were not vacated by NAM or revised by the April 29 Guidance.16

Filing for Issuers that are not required to submit a Conflict Minerals Report (“CMR”) remains the same: For Issuers that have conducted a reasonable country of origin inquiry (“RCOI”) and determined that they do not have reason to believe that their Conflict Minerals may have originated in the DRC or a Covered Country, the April 29 Guidance instructs that these Issuers must still disclose the result of their RCOI by filing a Form SD that also briefly describes the inquiry they undertook.17

Similarly, filing remains the same for Issuers that, after initially determining that they have reason to believe their Conflict Minerals may have originated in the DRC or a Covered Country, conducted due diligence and subsequently confirmed that their Conflict Minerals did not so originate or originated only from a scrap or recycled source. These Issuers must still file a Form SD that describes the RCOI and due diligence they undertook.18

Issuers that are required to file a CMR are no longer required to label products in their CMR: The April 29 Guidance provides that Issuers are no longer required to label products in their CMR as “DRC conflict free,” “DRC undeterminable,” or have “not been found to be ‘DRC conflict free.’”19

The Rule requires that the following Issuers submit a CMR:

  • Issuers that have reason to believe that their Conflict Minerals are from the DRC or a Covered Country, but cannot confirm the origin of those Conflict Minerals;
  • Issuers that confirm that their Conflict Minerals are from the DRC or a Covered Country; and
  • Issuers that have confirmed that their Conflict Minerals are from the DRC or a Covered Country and have determined that those Conflict Minerals have or have not benefitted or financed armed groups ("Armed-Group Connection").

The Rule as adopted required that these Issuers label products in their CMR as either “DRC conflict free,” “DRC undeterminable,” or have “not been found to be ‘DRC conflict free.’” These labels were based on the results of the Issuer’s due diligence in determining the origin and Armed-Group Connection of the Issuer’s Conflict Minerals. The April 29 Guidance provides that, although Issuers must still conduct due diligence on the origin and Armed-Group Connection of their Conflict Minerals and describe the results of that due diligence, they no longer have to label their products based on those results.20

Moving forward, all Issuers that are required to submit a CMR, regardless of whether they have or have not determined the origin or Armed-Group Connection of their Conflict Minerals, must include the following disclosures in their CMR: (1) a description of the due diligence the Issuer conducted, (2) the facilities used to process the Conflict Minerals, (3) the country of origin (if known), and (4) the steps taken to determine the mine or location of origin with the greatest possible specificity.21

Only Issuers that choose to affirmatively label their products as “DRC conflict free” must obtain an independent private sector audit (“IPSA”): The Rule as adopted required Issuers submitting a CMR to obtain an IPSA unless that Issuer claimed the “DRC undeterminable” exception during the grace period provided for in the Rule (“Temporary Transition Period”).22 The April 29 Guidance instructs that pending further action by the SEC or a court, Issuers are only required to obtain an IPSA if they choose to affirmatively label products as “DRC conflict free.”23

If an Issuer wants to affirmatively label products as “DRC conflict free,” it must submit a CMR that includes a description of: the products that are “DRC conflict free;” the facilities used to process the necessary Conflict Minerals in those products; the country of origin in those Conflict Minerals; and the efforts to determine the mine and location of origin of those minerals with the greatest possible specificity. Additionally, the Issuer must obtain an IPSA that expresses an opinion or conclusion as to whether the design of the Issuer’s due diligence measures is in conformity with the criteria set forth in the due diligence framework and whether the description of the Issuer’s due diligence measures is consistent with the process undertaken by the Issuer.

III. Key takeaways

Under the April 29 Guidance, Issuers are no longer required to label and associate products with armed groups in the DRC or a Covered Country. Moreover, Issuers are also no longer required to obtain costly IPSAs unless they choose to affirmatively label products as “DRC conflict free.”

Additionally, under the April 29 Guidance, Issuers may see less tangible benefits associated with the Rule’s Temporary Transition Period. Because Issuers are no longer required to label products, Issuers may view the decision to label a product as “DRC undeterminable” as a less attractive alternative to choosing not to label the product at all. Moreover, the IPSA exemption available to Issuers during the Temporary Transition Period may be less beneficial until further action is taken by the SEC or a court because the only Issuers that are required to obtain an IPSA are those that choose to affirmatively label products as “DRC conflict free.”

The June 2, 2014 deadline for Issuers to submit Form SDs and CMRs is still in effect for all portions of the Rule except the requirement that Issuer’s label their products as have “not been found to be ‘DRC conflict free.’” For Issuers with Conflict Minerals that are necessary to the functionality or production of a product that the Issuer manufactured or contracted to manufacture, the Issuer must still conduct an RCOI and, if necessary, conduct additional due diligence on the origin and Armed-Group Connection of the Conflict Minerals. Further, those Issuers must still make the required disclosures that were not vacated by NAM or revised in the April 29 Guidance.

The SEC states that it will consider the need to provide additional guidance before the June 2, 2014 filing due date.24 As the DC District Court reconsiders the Rule in light of NAM, and SEC Commissioners continue to dispute the effect of that holding on the Rule, changes to the Rule’s requirements may develop in the near future. Companies subject to the Rule should stay abreast of updates and seek guidance as necessary to understand the developing best practices in the area.


1 “The term ‘Conflict Mineral’ is defined in Section 1502(e)(4) of Dodd-Frank as (A) columbite-tantalite, also known as coltan (the metal ore from which tantalum is extracted); cassiterite (the metal ore from which tin is extracted); gold; wolframite (the metal ore from which tungsten is extracted); or their derivatives; or (B) any other mineral or its derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country.” See Conflict Minerals, Adopting Release No. 34-647716, 17 C.F.R. Parts 275 and 249b, n.6 Aug. 22, 2012).

2 Conflict Minerals, 77 Fed. Reg. 56,275 (Sept. 12, 2012) (codified at 17 C.F.R. §§ 240, 249b).

3 Nat’l Ass’n of Manufacturers, et al., v. Secs. & Exch. Comm’n, No. 1:13-cv-00635 (D.C. Cir. April 14, 2014).

4 The term “Issuer” means any natural person, company, government, political subdivision, agency, or instrumentality of a government that issues or proposes to issue any security. See Securities Act of 1933, § (2)(a)(4), 15 U.S.C. § 77B(a)(4).

5 The Rule requires Issuers to submit filings on or before May 31 each year. However, as May 31, 2014 is a Saturday, the SEC has instructed that first reports are due on or before Monday, June 2, 2014. See Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule, Keith F. Higgins, Director, SEC Division of Corporation Finance.

6 See id.

7 Order Issuing Stay, Exchange Act Release No. 72079, File No. S7-40-10 (May 2, 2014).

8 See id. at ¶ 2.

9 See our previous alert explaining the NAM case in greater detail.

10 See Nat’l Ass’n of Manufacturers, No. 1:13-cv-00635 at 20.

11 See id. at 23.

12 See Joint Statement on Conflict Minerals Decision, SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar.

13 See id. at ¶ 4.

14 See id.

15 Order Issuing Stay, Exchange Act Release No. 72079, File No. S7-40-10 (May 2, 2014).

16 See Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule, Keith F. Higgins, Director, SEC Division of Corporation Finance.

17 See id. at ¶ 2.

18 See id.

19 See id. at ¶ 3.

20 See id.

21 See id.

22 The Rule provides a Temporary Transition Period of two years for Issuers and four years for smaller reporting companies. During this time only, an Issuer may label its Conflict Minerals as “DRC undeterminable,” if it is unable to determine the origin of the Conflict Mineral or whether the mineral has an Armed-Group Connection. See Conflict Minerals, Adopting Release No. 34-647716, 17 C.F.R. Parts 275 and 249b, 29 (Aug. 22, 2012).

23 See id.

24 See id. at ¶ 4.