Those public companies that may have to comply with the SEC’s conflict minerals rule should be aware that the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) recently refused to rehear en banc the August 2015 decision of a three-judge panel of that court in National Association of Manufacturers v. SEC (NAM), a case challenging the validity of the conflict minerals rule (Rule). In its August 2015 decision (Rehearing Decision),¹ the D.C. Circuit panel reaffirmed its April 2014 decision (Original Decision, and together with the Rehearing Decision, Decisions)² that provisions of the Rule requiring issuers to report to the SEC and to disclose on their websites whether any of their products have not been found to be “DRC conflict free” violated the First Amendment.

The petitioners have until February 8, 2016 to petition the U.S. Supreme Court for a writ of certiorari seeking its review of the Decisions. If such a petition is not filed or is filed and denied, the Decisions will become final and the case will go back to the district court for further action. If the Supreme Court takes the case, it is unlikely to issue a decision prior to the May 31, 2016 filing deadline for the required Form SDs and any required conflict mineral reports (CMRs) for the 2015 reporting year. Moreover, even with a decision by the Supreme Court, further litigation at the district court is possible. Unfortunately, this means that the uncertainty surrounding the Rule is likely to continue for a considerable time.

The Decisions and the SEC’s partial stay of those parts of the Rule affected by the Original Decision³ do not affect core elements of the Rule, including the supply chain due diligence and SEC reporting requirements. Consequently, subject issuers must continue to comply with those requirements.

At a recent conference, representatives of the SEC’s Division of Corporation Finance (CorpFin) confirmed that, pending a change in the status of the Rule as affected by the Decisions, CorpFin’s guidance regarding compliance with the Rule in light of the Original Decision (Guidance)⁴ will remain in effect. Pending further action, subject issuers filing a CMR for the 2015 reporting year should not need to have an independent private sector audit (IPSA) of that CMR performed unless they voluntarily describe a product as “DRC conflict free” in that CMR.⁵ Subject issuers should take note that the CorpFin staff have previously advised issuers to exercise caution to avoid inadvertently labeling their products as “DRC conflict free” by using different words in their CMRs unless the issuers also have an IPSA of their CMRs performed.

Current Status of Complying with the Rule

The following is a brief summary of the steps that issuers must take to comply with the Rule until a different ruling occurs in NAM or the SEC takes additional action or issues additional guidance regarding the Rule:

• an issuer manufacturing products or contracting for the manufacture of products that it sells must continue to first ascertain if those products contain conflict minerals that are necessary to the production or functionality of such products (necessary conflict minerals);

• if the issuer has such products containing necessary conflict minerals (Conflict Products), it must perform a reasonable country of origin inquiry regarding the necessary conflict minerals in its Conflict Products and, where also required under the Rule, conduct due diligence regarding those necessary conflict minerals;

• if an issuer with Conflict Products is required to file a Form SD, but not a CMR, for 2015, the Form SD must be filed on or before May 31, 2016 and must contain a description of the issuer’s determination that none of the necessary conflict minerals contained in its Conflict Products originated in a covered country, a brief description of the reasonable country of origin inquiry performed by the issuer regarding such necessary conflict minerals and the results of that inquiry; and

• if an issuer with Conflict Products is required to file a Form SD and a CMR for 2015, the Form SD and CMR must be filed on or before May 31, 2016 and the CMR must contain:

  • a description of the due diligence that the issuer undertook in accordance with the Rule’s requirements, which due diligence must include, if any Conflict Products are represented in the CMR to be “DRC conflict free,” an IPSA, and certain disclosures regarding the IPSA;

  • for those of the issuer’s Conflict Products that it cannot determine to be “DRC conflict free,” disclosure of the facilities used to process the conflict minerals in such Conflict Products,⁶ the countries of origin of such conflict minerals and the efforts made to determine the mine or location of origin of such conflict materials with the greatest possibility specificity; and

  • if any of the issuer’s Conflict Products falls within the definition of “DRC conflict undeterminable,” a statement of the actions the issuer has taken since January 1, 2015 to mitigate the risks that the conflict minerals in such Conflict Products benefit armed groups.

Under the Rule’s provisions, issuers that are not smaller reporting companies would be required to identify in any CMR they file for 2015 or a subsequent reporting year those of their Conflict Products that fall within the definition of “DRC conflict undeterminable” as being Conflict Products “having not been found to be ‘DRC conflict free.’” The Guidance indicates, however, that for the time being issuers need not identify in their CMRs those of their Conflict Products that are not “DRC conflict free” as being “not found to be ‘DRC conflict free’” or “DRC conflict undeterminable.” The Rule’s transitional provision that requires issuers to disclose the facilities used to process the necessary conflict minerals in their Conflict Products that were “DRC conflict undeterminable” or the country of origin of such necessary conflict minerals only if the issuer knew that information after conducting the required due diligence no longer applies to issuers other than smaller reporting companies.⁷ The Guidance does not give such issuers any relief from the Rule’s stricter requirement for disclosure of such matters now applicable to them.

Conclusion

Although the Decisions are somewhat helpful to issuers required to file CMRs, the continuing need for issuers to include in their CMRs the disclosure described above regarding their Conflict Products that are not “DRC conflict free” means that such disclosures will serve to identify issuers having Conflict Products that either have not been found to be “DRC conflict free” or are “DRC conflict undeterminable.” Even if all of an issuer’s Conflict Products are “DRC conflict undeterminable,” such disclosures will still serve to stigmatize the issuer almost as effectively as would have compliance with the Rule without the benefit of the Decisions or the Guidance. At this point in 2015, however, it seems unlikely that the SEC will amend or supplement the Guidance to give issuers any relief on this or any other point with respect to the Rule, to require more extensive disclosure in the Form SDs and CMRs to be filed with respect to the 2015 reporting year or to change the SEC’s current position regarding IPSAs. Nevertheless, issuers having Conflict Products containing necessary conflict minerals should stay tuned for future SEC guidance and for further developments in NAM.

_{1. More information on the Rehearing Decision can be found here.}

_{2. Nat’l Assoc. of Mfrs. v. SEC, 748 F.3d 359 (D.C. Cir. 2014).} 

_{3. See In the Matter of Exchange Act Rule 13p-1 and Form SD, Order Issuing Stay (May 2, 2014), available at http://www.sec.gov/rules/other/2014/34-72079.pdf.}

_{4. See Keith F. Higgins, Director, SEC Div. of Corp. Fin., Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule (Apr. 29, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541681994.}

_{5. Under the Rule’s transitional provisions, smaller reporting companies that will file a CMR for one or both of the 2015 and 2016 reporting years need not have the CMR for such a reporting year audited if they have products that are classified as “DRC conflict undeterminable” and do not represent in the CMR that one or more of their Conflict Products are “DRC conflict free.”}

_{6. The Guidance states this requirement as requiring disclosure of “the facilities used to produce the conflict minerals.” Issuers should interpret that statement to be consistent with the Rule’s actual language, which requires a description of “the facilities used to process” the conflict minerals contained in Conflict Products that have not been found to be “DRC conflict free.” See paragraph (c)(2) of Item 1.01 of Form SD}

_{7. Such provision continues to apply to smaller reporting companies as to any CMR such issuers must file for the 2015 or 2016 reporting year.}