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By Yin Wilczek
April 29 --The Securities and Exchange Commission will implement the parts of its conflict minerals rule that were not called into question by the U.S. Court of Appeals for the District of Columbia Circuit, Chairman Mary Jo White said April 29.
White, testifying before the House Financial Services Committee, observed that the court “upheld the vast majority” of the rulemaking.
White said during her testimony that in the very near future, the Division of Corporation Finance will issue guidance to inform U.S. companies and foreign private issuers--entities covered by the required disclosures--that they will need to comply with the portions of the rule that were “clearly upheld” by the appellate court. Accordingly, the SEC's Division of Corporation Finance late April 29 issued guidance on the agency's conflict minerals requirements that caught some by surprise because of the broadness of its scope.
The guidance--in the form of a statement from division Director Keith Higgins--said that companies and foreign private issuers, in filing their first conflict minerals disclosures by June 2, do not have to describe their products as “DRC conflict free,” “not been found to be 'DRC conflict free,'” or “DRC conflict undeterminable.” The Corp. Fin. guidance said that “[p]ending further action,” an independent private sector audit is not required unless a company voluntarily describes its product as “DRC conflict free” in its conflict minerals report.
SEC spokesman John Nester declined to comment on White's remarks. The agency's two Republican members--Commissioners Daniel Gallagher and Michael Piwowar--April 28 urged the commission to stay the entire rule (see related story in this issue).
The rule requires companies and foreign private issuers in the U.S. to report their use of so-called “conflict minerals”--gold, tantalum, tin and tungsten from the Democratic Republic of Congo and adjacent countries--if those minerals are “necessary” to a product made by the companies.
The rule was mandated by Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Its requirements will impact some 6,000 SEC-reporting issuers and perhaps as many as 300,000 of their suppliers.
The first disclosures on a new Form SD--covering the reporting period of Jan. 1 to Dec. 31, 2013--must be submitted to the commission by May 31 (or June 2, given that May 31 is a Saturday).
On April 14, a divided D.C. Circuit--in response to a legal challenge by industry petitioners--concluded that the statute and the SEC rule violated the First Amendment to the extent that they require issuers 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” .
During the House Financial Services Committee hearing, White was asked by Rep. Bill Huizenga (R-Mich.) how the SEC intended to proceed in the wake of the court's decision. “Why not hit the pause button?” he asked, citing the huge economic impact of the rule.
The SEC chairman responded that “there is a severability” provision in the rule. The D.C. Circuit's invalidation of one portion of the regulation did not alter the other requirements, and the court “went out of” its way to make that point, she added. “Clearly there may be things going forward that affect the invalidated, you know, piece of that rulemaking, but the rest of it stands on its own.”
Meanwhile, the industry groups that challenged the rulemaking--the Business Roundtable, the U.S. Chamber of Commerce and the National Association of Manufacturers--did not have an immediate response to White's remarks.
The groups previously said in an April 24 statement that the SEC should stay the rule.
Sen. Dick Durbin (D-Ill.) and Rep. Jim McDermott (D-Wash.), two of the key authors of Section 1502, applauded the SEC's decision to continue implementing the rule.
Durbin spokesman Max Gleischman told Bloomberg BNA that the senator “looks forward to seeing the law implemented.”
McDermott, for his part, said in a statement that the SEC's rule should be upheld. “I await the final guidance from the SEC and reiterate that this matter is, first and foremost, about saving lives in the midst of a humanitarian crisis and destructive civil war in the Democratic Republic of Congo,” he added.
Durbin and McDermott joined with 10 other Democratic lawmakers in an April 21 letter telling the SEC to press on with the rule's implementation (see related story in this issue).
Very generally, the SEC rule requires a three-step process in which companies must:
• determine if they are 'issuers” covered under the rule;
• make a reasonable country-of-origin inquiry (RCOI) into whether the conflict minerals in their products originated from the DRC or adjoining countries, or come from scrap or recycled sources; and
• exercise due diligence on the source and chain of custody of their conflict minerals based on a nationally or internationally recognized framework.
Securities attorneys previously suggested that the D.C. Circuit's ruling does not impact the requirement for issuers to analyze their raw materials, perform an RCOI, exercise due diligence on the source of the materials, file a Form SD with the SEC and, if necessary, file a conflict minerals report as an exhibit with the Form SD.
Michael Hermsen, a Chicago-based partner at Mayer Brown LLP, told Bloomberg BNA that it should not be that hard for the SEC to sever the unconstitutional part of the rule from the parts that were upheld. The real question, however, is the value of the disclosures without the “piece” that the D.C. Circuit invalidated, he said.
“Forcing a company to disclose that it had manufactured products that contained minerals that were not DRC conflict free seemed to be the primary purpose of the new rule,” Hermsen said. Without that disclosure, it is “questionable how meaningful” any of the remaining disclosures will be. He added that it will be interesting to see how Corp. Fin. handles the matter in its guidance to issuers on the path forward.
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