It is clear that Michael Piwowar, Acting Chairman of the Securities Exchange Commission (“SEC”) is not a fan of the conflict minerals rule. Earlier this month, the Acting Chairman and the Division of Corporation Finance released two statements regarding rule, both of which clearly state that the regulation will not be an enforcement priority.
By way of background, the statements were published after long-running litigation regarding the conflict minerals rule finally reached a formal conclusion. On April 3, the U.S. District Court for the District of Columbia issued final judgment in National Association of Manufacturers v. SEC. The District Court’s action followed a August 2015 decision by D.C. Circuit Court of Appeals striking down the portion of the rule that required companies to declare certain products “not DRC conflict free” in their SEC filings. The appellate court had determined that that aspect of the rule violated the First Amendment.
The District Court’s final judgment remanded the case to the SEC. One of the questions now before the Commission is whether the “not DRC conflict free” description was required only by the rule, as issued by the SEC in August 2012, or whether that requirement originated in the original statutory language, Section 1502 of the Dodd-Frank Act, enacted in July 2010.
Statement from the Division of Corporation Finance
After the District Court’s judgment was issued, the SEC’s Division of Corporation Finance issued a statement on April 7 noting that the “court’s remand has now presented significant issues for the Commission to address.” The statement also noted its receipt of several comments on the rule in response to the call for comments issued by the Acting Chairman on January 31. Notably, in that call for comments, the Acting Chairman had referred to the rule as “misguided.”
In light of the need to consider both the issues raised by the judicial determinations, and the comments recently submitted, the Division of Corporation Finance stated that it “will not recommend enforcement actions” if companies only file the required Form SD and don’t include a full Conflict Minerals Report in their upcoming filings, due on May 31, 2017.
Statement from Acting Chairman Michael Piwowar
The statement by the Division of Corporation Finance was followed by a statement from the Acting Chairman. In the statement, Acting Chairman Piwowar noted the uncertainties that remained after the courts’ decisions and reported that he has instructed SEC staff to begin working on a recommendation with regard to the conflict minerals rule.
Most notably, Acting Chairman also observed that the “primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals” that are the basis of a standard Conflict Minerals Report “is to enable companies to make the disclosure found to be unconstitutional.” He concluded by stating that “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” the requirement to prepare a full Conflict Minerals Report, as required by Item 1.01(c) of Form SD.
The statement from the Acting Chairman immediately prompted a strong retort from Democratic Commissioner Kara Stein, who argued that Piwowar’s actions were unprecedented and reflected an attempt to engage in “de facto rulemaking” that “represents a troubling attack not only on the Commission process, but also on the restraints of government power.” The Acting Chairman’s previous statements regarding the rule had already prompted a call from Senate Democrats for an investigation by the SEC’s Office of the Inspector General.
What are companies left to do at this point? For most companies, the latest statements will most likely not have significant impact on internal compliance efforts with regard to the upcoming filing, as most efforts will have largely been completed by this point.
In light of the fact that failure to file a Conflict Minerals Report describing due diligence efforts is not likely to lead to enforcement action, companies subject to filing requirements need to determine whether to include the exhibit with the Form SD, if a full Conflict Minerals Report would have normally have been required. Companies could choose to limit their disclosure to a Form SD and a description of their reasonable country of origin inquiry. This may prompt questions from stakeholders, including socially responsible investors and NGOs, as to why a company has chosen not to disclose its full due diligence efforts. For many companies, such stakeholder considerations are likely to be a determining factor for this year’s filings, especially in this time of considerable uncertainty.
Looking ahead to next year’s filings, companies can only hope for greater clarity as they determine how best to allocate compliance resources. Unfortunately, such clarity is not likely to be immediately forthcoming.