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On April 7, 2017, the Division of Corporation Finance of the Securities and Exchange Commission (the “Commission”) issued a statement on the effect of the recent court decisions in National Association of Manufacturers v. SEC (discussed in our Locke Lord QuickStudy available here) noting that in light of the uncertainty regarding how the Commission will address the significant issues now facing its conflict minerals rule, the Division of Corporation Finance “has determined that it will not recommend enforcement action to the Commission 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.” In a separate statement, Acting Chairman Michael S. Piwowar noted 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 therefore “it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.”
How Should Companies Handle Their May 31, 2017 Conflicts Mineral Filings?
The Division of Corporation Finance’s statement does not impact Rule 13p-1, which requires covered public companies to file a Form SD no later than May 31st, and still requires covered public companies to disclose the matters required under paragraphs (a) and (b) of Item 1.01 of Form SD.
Paragraph (a) of Item 1.01 of Form SD requires that if any conflict minerals are necessary to the functionality or production of a product manufactured by the company or contracted by the company to be manufactured, the company must conduct in good faith a reasonable country of origin inquiry (“RCOI”) regarding those conflict minerals to determine whether any of the conflict minerals originated in the Democratic Republic of the Congo (the “DRC”) or an adjoining country or are from recycled or scrap sources.
Paragraph (b) of Item 1.01 of Form SD requires that if the company determines, or reasonably believes, based on its RCOI, that its necessary conflict minerals did not originate in the DRC or an adjoining country or did come from recycled or scrap sources, the company must disclose in its Form SD its determination and briefly describe the RCOI it undertook and the results thereof.
Alternatively, paragraph (c) of Item 1.01 of Form SD requires that if the company knows, or reasonably believes, based on its RCOI, that any of its necessary conflict minerals originated in the DRC or an adjoining country and are not from recycled or scrap sources, the company must (i) exercise due diligence, including an independent audit, on the source and chain of custody of its conflict minerals, and describe the due diligence conducted in the conflict minerals report attached as an exhibit to its Form SD and (ii) describe its products that contain necessary conflict minerals, the facilities used to process the necessary conflict minerals, the country of origin of the necessary conflict minerals, and the efforts to determine the mine or location of origin with the greatest possible specificity.
Practically, at this late date in the conflict minerals reporting process, most companies that will be required to make disclosures under Item 1.01(c) of Form SD have already conducted the necessary due diligence and are in the process of preparing their conflict minerals report. Furthermore, notwithstanding this latest relief from the Commission, other interested parties, such as a company’s shareholders and customers, may react negatively to any abbreviated disclosure in a company’s Form SD. It should also be noted that this latest Commission relief only sets forth the Division of Corporation Finance’s enforcement position and does not address the risk of private causes of action under Section 18 of the Exchange Act, as discussed in the conflict minerals rule adopting release, against a company for misleading statements in a Form SD. Therefore, we expect that many companies will file a 2017 Form SD consistent with their 2016 Form SD filing.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.