Member Article

Prompted by the United States Court of Appeals for the District of Columbia Circuit’s decision in National Association of Manufacturers, et al. v. SEC, et al. (D.C. Cir. April 14, 2014), which held a portion of the conflict minerals rule (the “Rule”) invalid on First Amendment grounds, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) issued updated guidance on April 29, 2014 relating to upcoming Form SD filing obligations.

Background

On August 22, 2012, the SEC adopted the Rule, requiring SEC-regulated companies to disclose on new Form SD to be filed with the SEC the company’s use of conflict minerals and whether they originated in the Democratic Republic of the Congo (“DRC”) or an adjoining country. The disclosure is required in connection with a company’s use of conflict minerals that include tantalum, tin, gold or tungsten if those minerals are “necessary to the functionality or production of a product” manufactured by those companies. The Rule’s adoption was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and was adopted due to concerns that the exploitation and trade of conflict minerals by armed groups is helping to finance the conflict in the DRC region and furthering a humanitarian crisis.

National Association of Manufacturers, et al. challenged Securities Exchange Act Rule 13p-1 and Form SD, which were both adopted pursuant to Securities Exchange Act Section 13(p), and, on April 14, 2014, the United States Court of Appeals for the District of Columbia Circuit held that Section 13(p)(1) and Rule 13p-1 “violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have not been found to be ‘DRC conflict free.’” The court did not find any other violations of Rule 13p-1 or Form SD.

Guidance

On April 29, 2014, the Director of the SEC’s Division of Corporation Finance issued updated guidance on Form SD filing obligations stating that, notwithstanding the National Association of Manufacturersdecision, issuers are still advised to file their Form SD on or before June 2, 2014. However, companies will not be required to describe their products as “DRC conflict free,” “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable,” and, pending further action, an independent private sector audit (“IPSA”) will not be required unless a company voluntarily elects to describe its products as “DRC conflict free” in its Conflict Minerals Report. The Division’s full statement can be found here.

Stay

On May 2, 2014, the SEC issued an order staying the effective date for compliance with those portions of Exchange Act Rule 13p-1 and Form SD found invalid in the National Association of Manufacturers decision. The SEC’s press release discussing the order can be found here, and the order itself can be found here.

In addition to the stay issued on May 2, 2014, the trade associations that brought suit in National Association of Manufacturers filed an emergency motion on May 5, 2014, seeking a stay of the entire Rule or at minimum of the June 2, 2014 filing deadline. The trade associations claim that, because of the National Association of Manufacturers decision, the objectives of the Rule will no longer be met since companies are no longer required to disclose whether minerals are “DRC conflict free.” The trade associations have asked that the court decide on the associations’ motion by May 26.

Additional Litigation

Another case before the United States Court of Appeals for the District of Columbia Circuit, American Meat Institute v. U.S. Department of Agriculture, may also impact the Rule. American Meat Institute, which is scheduled for oral argument on May 19, 2014, will examine the appropriate standard for review of mandatory disclosure of commercial information.

FAQs

On April 7, 2014, the Division of Corporation Finance released an updated Frequently Asked Questions (the “FAQs”) with nine new topics (questions 13-21) providing guidance relating to disclosure regarding the use of conflict minerals from DRC or adjoining countries. Among the topics covered are:

• When a certified public accountant must perform the IPSA;
• If an IPSA is required when determining at least one product may be described as “conflict undeterminable” during the temporary transition period;
• In the Conflict Minerals Report, how to describe a product based upon various combinations of conflict minerals from different sources;
• The scope of the IPSA as it relates to the issuer’s due diligence measures and inquiries into country of origin;
• The appropriateness of inclusion of disclosures in the Conflict Minerals Report (and IPSA) of conflict minerals from recycled or scrap sources; and 
• The extent of the issuer’s description of the design of its due diligence in the Conflict Minerals Report.

The complete set of FAQs can be found here. Please note that the SEC has updated the FAQs to include the following statement:

Some of the following Frequently Asked Questions may be superseded by the Commission’s Partial Stay of the Conflict Minerals Rule, May 2, 2014, and by the Statement of the Division of Corporation Finance on the Conflict Minerals Decision, April 29, 2014.

Impact

Currently, the only change to the reporting requirements under the Rule is the SEC’s partial stay on product description requirements, as discussed above, and the June 2, 2014 filing deadline remains in effect. Taking into account the trade associations’ May 5, 2014 motion, and the American Meat Institute litigation, it is unclear how reporting requirements under the Rule might change before the filing deadline. As such, reporting companies should continue their steps to be in a position to comply with the parts of the Rule not affected by the partial stay (e.g., the reasonable country of origin inquiry and due diligence requirements) and to file Form SD on June 2, 2014. However, companies should consider postponing filing their disclosures until June 2, 2014, in case a decision vacating the Form SD filing requirement is reached on the trade associations’ motion.

Haynes and Boone, LLP will continue to monitor and provide guidance on any changes to the reporting requirements under the Rule.

If you have any questions about this topic, please contact a member of our Capital Markets and Securities practice group.