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E-MailMichael R. Littenberg is a partner at Ropes & Gray LLP. This post is based on two Ropes & Gray publications by Mr. Littenberg, Julia L. Chen, and Emily K. Burke.
After 1,627 days and enough law firm memos to deforest a small country, the litigation relating to the Conflict Minerals Rule came to an end [April 3, 2017]. In this post, we discuss what this means for calendar year 2016 compliance, as well as the many other moving pieces relating to the Rule.
The Court’s Final Judgment
[April 3, 2017], Judge Ketanji Brown Jackson, a District Court Judge in the District of Columbia, entered a final judgment in the Conflict Minerals Rule case. In a short three paragraph opinion, the District Court (1) declared that Section 1502 of Dodd-Frank, Rule 13p-1 thereunder and Form SD violate the First Amendment to the extent that the statute and the rule require companies to report to the SEC and state on their websites that any of their products “have not been found to be ‘DRC conflict free,’” (2) held unlawful and set aside the Rule to the extent that it requires companies to report to the SEC and state on their websites that any of their products “have not been found to be ‘DRC conflict free’” and (3) remands to the SEC, to take action in furtherance of the Court’s decision.
Judge Jackson’s decision was expected. On March 10th, the parties submitted a Joint Status Report requesting that the Court enter a final judgment in accordance with the earlier decisions in the case by the Court of Appeals. The appellate court decision is discussed in our Alert available here.
But the Uncertainty Continues
Although the litigation has come to a close, the uncertainty surrounding the Conflict Minerals Rule continues:
- On January 31st, SEC Acting Chairman Piwowar published Statements directing the SEC staff to consider whether the SEC’s 2014 guidance is still appropriate and whether any additional relief is appropriate in the interim, and opening up a comment period on the Rule, which closed during the middle of March. Putting aside form letters, the SEC received approximately 300 comment letters, both supporting and against the Rule, as well as letters taking the middle ground by advocating for modifications to the Rule.
- [In early April], four Democrats on the Senate Banking Committee sent a letter to the SEC’s Inspector General asking him to conduct an investigation into whether this and other unrelated actions taken by Acting Chairman Piwowar were legally permissible.
- Whether and when the SEC might modify the Rule in response to comments received and the lessons learned from four years of compliance by companies, and whether the letter to the IG might temper its appetite to do so, remain open questions.
- In early February, a draft of a purported Presidential Memorandum that would suspend the Conflict Minerals Rule began to circulate. Under Section 1502 of Dodd-Frank, the SEC is required to revise or temporarily waive the requirements of the Rule if the President transmits to the SEC a determination that doing so is in the national security interest of the United States and the President includes the reasons therefor. Under Section 1502, the revision or waiver can last for up to two years. The draft Memorandum contemplates a two-year waiver.
- The draft Memorandum also directs the Secretaries of State and Treasury to propose an alternative plan to address problems in the DRC region that takes a targeted approach focused on breaking the link between commodities and armed groups in the region. Thus far, the White House has not commented on the draft Memorandum in circulation.
- For more information on the draft Memorandum, please see the webinar hosted by Assent Compliance in which we participated, which is available here.
- On March 27th, the State Department announced that it, along with other agencies and departments, is seeking input from stakeholders to inform recommendations of how best to support responsible sourcing of 3TG. The Department will consider requests and comments received or postmarked by April 28th.
- The Financial Choice Act introduced during 2016 contemplated the repeal of Section 1502 of Dodd-Frank. The chances are high that repeal of Section 1502 will be sought in successor legislation.
- Finally, Jay Clayton, the President’s nominee for SEC Chairman, is moving closer to being seated. The Senate Banking Committee is scheduled to vote [April 4, 2017], after which he will move to confirmation by the full Senate. As SEC Chairman, he will drive many aspects of the SEC’s agenda, including conflict minerals regulation.
Meanwhile, in the EU
In other news, [on April 3, 2017], the European Council voted to approve the pending EU conflict minerals regulation. The regulation was previously approved by the EU Parliament and follows on the November 22, 2016 political agreement reached by the Parliament and the Council.
The EU conflict minerals regulation, which places mandatory obligations on importers of 3TG but not product manufacturers and sellers, takes effect on January 1, 2021.
The Division of Corporation Finance’s Statement
On [April 7, 2017], the SEC’s Division of Corporation Finance issued an Updated Statement on the Conflict Minerals Rule (the “Rule”). According to the April 7th Statement, the Court’s remand has presented significant issues for the SEC to address. In light of the uncertainty regarding how the SEC will resolve those issues and related issues raised by commenters in the recent open comment period on the Rule, the Division has indicated that it will not recommend enforcement action to the Commission if registrants, 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.
Paragraph (a) of Item 1.01 requires a reasonable country of origin inquiry (“RCOI”) if conflict minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by a registrant. Paragraph (b) provides that, if, based on its RCOI, the registrant determines that its necessary conflict minerals did not originate in the DRC region or came from recycled or scrap sources, it has no reason to believe that its necessary conflict minerals may have originated in the DRC region, or it reasonably believes that its necessary conflict minerals did come from recycled or scrap sources, it must, in the body of its Form SD, disclose its determination and briefly describe the RCOI it undertook and the results of the inquiry it performed. For those registrants that are not able to stop at the RCOI, paragraph (c) of Item 1.01 generally requires the registrant to exercise due diligence and file a Conflict Minerals Report exhibit to its Form SD that contains enhanced disclosure on the registrant’s due diligence measures, its in-scope products and the processing facilities and countries of origin of the necessary conflict minerals.
The Division’s Statement indicates that it is subject to any further action that may be taken by the SEC, expresses the Division’s position on enforcement action only and does not express any legal conclusion on the Conflict Minerals Rule.
Acting Chairman Piwowar’s Statement
Also on [April 7], SEC Acting Chairman Piwowar published a separate Statement. In his Statement, he indicated that he has instructed the SEC staff to begin work on a recommendation for future SEC action and that, in preparing its recommendation, the Staff will consider, among other things, the public comments received in response to the January 31st request for comment on the Rule. Acting Chairman Piwowar, who has made it well known that he is opposed to the Rule, further indicated in his Statement that “[t]he 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.” and that “[i]n 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.”
Early Reactions to the Statements
News sources have reported that SEC Commissioner Kara Stein, a Democratic Commissioner and currently the only other seated SEC Commissioner, has taken exception to Acting Chairman Piwowar’s action. She has accused him of acting beyond his authority to engage in de facto rulemaking.
As of [April 9, 2017], the NGOs focused on this issue have not published statements, but we expect those to be forthcoming. We also would not be surprised to see another shot across the bow from Democrats on the Senate Banking Committee. On March 29th, four Democrats on the Senate Banking Committee sent a letter to the SEC’s Inspector General asking him to conduct an investigation into whether Acting Chairman Piwowar’s January 31st Statement opening up a comment period on the Rule and other unrelated actions taken by Acting Chairman Piwowar were legally permissible.
Near Term Steps for Registrants
The Statements will have little impact on the calendar year 2016 traceability process at most registrants. In most cases, that process has been completed or is close to completion. And, in any event, there is significant overlap between the RCOI and due diligence processes.
For most registrants, the most immediate considerations will be how much to say in the calendar year 2016 Form SD and whether to include a separate Conflict Minerals Report exhibit. As a result of the Division of Corporation Finance’s Statement, we expect that there will be more variation in disclosure this year relative to calendar year 2015 reporting. Among the factors that registrants will be considering in crafting their disclosure are NGO and socially responsible investor pressure around responsible minerals sourcing and disclosure rankings, messaging to commercial customers and consumers, internal corporate social responsibility values and their best guestimate as to where the Rule and market practice will be heading over the next year.
