SEC Official Offers Three Pointers on Issuers’ Conflict Mineral Disclosures

Stay current on changes and developments in corporate law with a wide variety of resources and tools.

By Yin Wilczek

Sept. 15 — After staff review of issuers' inaugural conflict mineral disclosures, Keith Higgins, the director of the Securities and Exchange Commission's Division of Corporation Finance, Sept. 12 offered three key observations.

The first is that some issuers conflated their reasonable country-of-origin inquiry (RCOI) with the due diligence requirements, Higgins told the American Bar Association's Business Law Section meeting in Chicago. “Sharpening up the precision” with which issuers describe the RCOI process “would be one observation,” he said.

Higgins also defended the SEC's handling of well-known seasoned issuer (WKSI) waiver requests that recently was criticized by some lawmakers, as well as SEC Commissioner Kara Stein.

The SEC official also offered shareholder proposal statistics from the 2014 proxy season.

Higgins said he spoke his own views, and not on behalf of the commission or other staff members.

Conflict Minerals Rule

1934 Securities Exchange Act Rule 13p-1 requires U.S. public companies and foreign private issuers to disclose their use of conflict minerals—gold, tantalum, tin and tungsten from the Democratic Republic of Congo and adjacent countries—if those minerals are “necessary” to a product they made.

Very generally, the SEC rule requires issuers to engage in three steps:

• determine if they are “issuers” covered under the rule;

• make a RCOI into whether the conflict minerals in their products originated from the DRC or adjoining countries, or came 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.

About 1,300 issuers filed their first-ever disclosures June 2.

Higgins acknowledged that there could be an overlap in the RCOI and due diligence processes, and there is no requirement for issuers to perform an RCOI if they move directly on to the due diligence phase. “But if you determine that your conflict minerals didn't come from” the conflict region, “you should be providing clear and specific language about the process that you used to reach the determination,” he said.

Conflict Free?

In the second observation, Higgins noted that some companies are suggesting that their products are conflict-free without expressly saying so. Companies that have not chosen to label their products as conflict-free should avoid disclosure that suggests so, he said. “Obviously, if you say your [product] is conflict-free, you have to provide an independent private sector audit, so nudging up close to that with some implied statement is probably not a good idea.”

Pursuant to SEC recent staff guidance, companies do not have to label their products as “DRC conflict free,” “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable”. However, those that choose to characterize their products as DRC conflict-free must provide an independent private sector audit of their disclosures.

Finally, Higgins noted that even if issuers cannot determine whether their products involved minerals from the conflict zone, they still must disclose the smelter or refiner used to process their minerals, if such facilities are known.

According to a recent Beveridge & Diamond PC release, about 75 percent of issuers did not provide in their conflict mineral disclosures any information about the smelters in their supply chains.

Higgins added that the division is unlikely to provide additional interpretive guidance regarding the conflict mineral requirements while the status of the rule remains uncertain due to pending litigation in the U.S. Court of Appeals for the District of Columbia.

In April, a split D.C. Circuit panel found that the rule ran afoul of the First Amendment to the extent it requires 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”.

The court recently asked the business groups that challenged the rule to file responses to the SEC's petition asking it to reconsider the ruling.

WKSI Waivers

As to the division's handling of WKSI waivers through authority delegated from the SEC, Higgins stressed that these are “not rubber stamps.” For one, the division does not disclose the waivers that it denied, he said. He also noted that the commission, when it deems it necessary, considers the waiver requests itself. Moreover, Higgins pointed to Corp. Fin.'s recent updated guidance setting out the conditions under which it grants the waivers.

Higgins noted that the division also is spending a lot of time on waivers related to the SEC's bad actor provision. Corp. Fin. is putting together a similar policy statement on its handling of bad-actor waiver requests, which hopefully will “get going soon,” he said.

Shareholder Proposals

In other comments, Higgins told the audience that the division received 285 no-action requests through its shareholder proposal process. That number is about 12 percent fewer than the 2013 proxy season, he said.

About 20 percent of the no-action requests were withdrawn, Higgins continued. Of the remaining no-action requests, the staff agreed that one-third of the proposals could be excluded from corporate proxy materials on procedural grounds. The staff agreed that about 19 percent of the proposals could be omitted because they were vague and misleading, he said.

However, the staff denied about 58 percent of the no-action requests involving purportedly vague or misleading proposals, Higgins added. That “suggests we are more likely to deny no-action relief on vague and misleading [grounds] than we are to grant it.”

Higgins also noted that about 64 percent of the requests for no-action relief involved environmental, social and governance issues, while another 14 percent involved executive compensation.

Higgins was asked whether the division will recommend piecemeal reform of the SEC's shareholder proposal rule in light of several petitions—including one by nine business groups—asking for amendments. Shareholder proposals are a “complex topic” for which “cherry picking particular pieces” for reform likely will not be a “winning strategy,” he said.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Susan Jenkins at

The Beveridge & Diamond PC conflict minerals release is available at


Request Corporate on Bloomberg Law