Regulators provided limited relief in early May to corporations regarding reporting under the conflict-mineral rules, but companies must still comply with the bulk of the controversial regulation stemming from the Dodd-Frank Act by June 2.
The law impacts Securities and Exchange Commission (SEC) registrants that manufacture or contract to manufacture products containing, at least for now, cassiterite, columbite-tantalite, gold, and wolframite and related derivatives—often found in high tech and industrial products. By June 2, most of those companies must have determined whether they use conflict minerals originating from the Democratic Republic of the Congo (DRC) or bordering countries and completed required reporting.
Companies completing initial public offerings receive additional time to comply. If the IPOs are completed by the end of April in a given year, the companies must comply within a year after May 31 deadline (or the next weekday should the deadline fall on a weekend, as it does this year); those issuing stock after May 1 will have an additional year. Those compliance-deadline exceptions also apply to SEC-registered companies acquiring manufacturers that may use conflict minerals.
On May 2, the SEC announced stays for compliance in two areas, following a mid-April appeals-court ruling, in National Association of Manufacturers, et al v. SEC, that certain parts of the SEC’s rule violated the First Amendment. One stay provides limited disclosure relief for registrants identifying themselves as “DRC conflict free” or not. The other more substantively delays indefinitely the requirement for a third-party audit of a report that must be filed if a company’s conflict minerals originate in DRC or its adjoining countries.
Companies making products, whether themselves or through contract manufactures, that do not contain conflict minerals are free and clear, with no reporting obligations. The remaining companies must conduct a good-faith inquiry into the country of origin of their materials and file Form SD describing their inquiry and its results, as well as a link to a website where the company publicly displays that information.
If a company finds its conflict minerals originated in DRC or surrounding countries, or it has reason to believe so, it must dig deeper to determine whether the minerals are “conflict free”—not benefiting armed groups directly or indirectly.
“If, in exercising due diligence, the issuer determines either that the conflict minerals are not from the [DRC or adjoining countries], or are from recycled or scrap sources, it is required to describe this due diligence when it files Form SD, but it is not required to file a conflict minerals report,” says Ernst & Young in a report on the subject.
Under the rule, companies that know or remain uncertain after the due diligence process whether their conflict minerals came from DRC or its surrounding countries must file a conflict mineral report in which they identify themselves as conflict free or not, or if their status is undeterminable. The appeals court, however, found that element of the rule—“an affirmative statement implying something ‘ethically tainted’” even if the issuer condemns Congo war atrocities—violates the First Amendment, prompting one of the SEC’s two stays.
Kelly Howard, a partner at Crowell & Moring, said delaying the self-identification requirements may have little impact on companies concerned about their reputations based on use of minerals sourced from DRC, since “the existence of a conflict mineral report alone could be a blemish in the eyes of the market.”
Ms. Howard added that the greater benefit of the SEC stays will be to companies that must file conflict mineral reports because the other stay relieves them of having to obtain a third-party audit of their due diligence and current reports. The SEC estimates that 75 percent of registrants for which conflict minerals are necessary to the functionality or production of the product will have to generate conflict minerals reports.
How long the stays will remain is uncertain.
“The SEC and court did not give a time limit. We estimate it will be at least a few months or longer if the SEC decides to appeal, so certainly through the first due-date of these forms,” Ms. Howard said. She added the audit requirement is likely to return in some form, as the court did not address the audit in its opinion, and an audit itself does not raise the same First Amendment issues.
E&Y notes that the SEC estimates approximately 6,000 issuers will be directly impacted by the rule, including many private company suppliers indirectly, and the initial aggregate cost of compliance may initially be as high as $4 billion, with annual costs thereafter between $207 million and $609 million.