April 10, 2017

Conflict Minerals: Corp Fin Halts “Source/Custody Chain” Diligence

As Broc blogged earlier this month, the DC District Court entered a final judgment in the conflict minerals case – which placed the rule’s future squarely in the SEC’s lap.

On Friday, Corp Fin issued a statement indicating that, pending further review, it would not pursue enforcement proceedings against companies that didn’t comply with the source and “chain of custody” due diligence requirements in Item 1.01(c) of Form SD.  Here’s an excerpt from Corp Fin’s statement:

Although the district court set aside those portions of the rule that require companies to report to the Commission and state on their website that any of their products “have not been found to be ‘DRC conflict free,’” that court and the Court of Appeals left open the question of whether this description is required by the statute or, rather, is a product of the Commission’s rulemaking.

In addition, as a result of a request by the Acting Chairman, we have received several comments regarding the desirability of additional guidance or whether relief under the rule is appropriate. Those comments identified several areas for the Commission to consider.

The court’s remand has now presented significant issues for the Commission to address. At the direction of the Acting Chairman, we have considered those issues. In light of the uncertainty regarding how the Commission will resolve those issues and related issues raised by commenters, 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.

While the conflict minerals rule remains alive, the source & chain of custody due diligence requirements in Item 1.01(c) are widely regarded as its most burdensome aspects.  In a separate statement, Acting Chair Mike Piwowar offered the SEC’s rationale for the decision to halt enforcement of this aspect of the rule:

 The 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.

Piwowar added that until the issues raised by the Court’s decision are resolved, “it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.”

So what are you supposed to do now with your Form SD?  This Gibson Dunn blog – and this Steve Quinlivan blog – review the reporting obligations that remain in effect.

EU: Full Steam Ahead on Conflict Minerals

The future of conflict minerals disclosure may be uncertain in the US – but it’s full steam ahead in the EU. This recent blog from Cooley’s Cydney Posner reports that the European Parliament overwhelmingly approved new rules on conflict minerals. There are many similarities between the US & EU versions of the rules, but the blog highlights a number of important differences. Here’s an excerpt highlighting some of the differences in approach:

Unlike Dodd-Frank, which is primarily disclosure-based, EU Member State authorities will verify compliance by EU importers by examining documents and audit reports and, if necessary, carrying out on-the-spot inspections of an importer’s premises.

The EU rules are largely more prescriptive than the U.S. rules, even though both look to the OECD due diligence framework. Importers will be required to adopt and communicate a supply chain policy (including standards consistent with the OECD model), to incorporate the policy into supplier agreements, to structure their internal management systems to support supply chain due diligence and to establish grievance mechanisms.

The rules will also require EU importers to implement an elaborate supply chain traceability system that will require detailed information about the identity of the suppliers, the country of origin, the type & quantity of minerals and when they were mined. Even more information will be required for minerals originating in conflict-affected areas. The rules are scheduled to go into effect in 2021.

FCPA: DOJ Extends Pilot Program

As noted in these memos, the DOJ has announced that it will extend its pilot program on FCPA enforcement – the 1-year period would otherwise have expired in a few weeks. See this speech by Acting Assistant AG Ken Bianco about the program.

John Jenkins