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Compliance : Dodd Frank : Supply Chain : Conflict Minerals

Confusion Continues over Conflict Minerals Reporting Obligations

By Barbara A. Jones
Barbara A. Jones
Shareholder, Corporate and Securities Practice Group
Greenberg Traurig

Since the controversial Rule 13p-1, or “Conflict Minerals Rule,” was adopted by the Securities and Exchange Commission (SEC) in August 2012 under the Securities Exchange Act of 1934, as amended (Exchange Act), as mandated by the Dodd-Frank Act, there has been ongoing confusion surrounding compliance. Companies have struggled with the convoluted process of determining which of their products may contain conflict minerals, whether the company itself is deemed to “contract to manufacture” certain products, and whether suppliers are sourcing from the Democratic Republic of Congo and adjoin countries (DRC). 

The statute and the Rule require SEC-reporting companies that manufacture or contract to manufacture products containing “conflict minerals” (columbite-tantalite, cassiterite, woframite, and their derivatives (tantalum, tin and tungsten), and gold) to undertake supply chain diligence to determine if any of the minerals were sourced from smelters or refiners in the DRC that finance or contribute to, directly or indirectly, militant activities or human rights abuses in the region. Companies are then required to report their findings on a calendar-year basis, with the first report on Form SD due May 31, 2014 (June 2, 2014 since May 31 is a Saturday).  Industry cost estimates for the initial compliance undertaken by companies throughout the supply chain have been as high as $16 billion.

Just as the May 31, 2014 (June 2) filing deadline is approaching, recent and rapid developments have cast new shadows of uncertainty on how SEC reporting companies should handle compliance.

April 14, 2014: Federal Appeals Court Holds SEC Conflict Minerals Rules Violate Free Speech
On April 14, 2014, a three-judge panel of the U.S. Court of Appeals for the District of Columbia, in an opinion authored by Senior Circuit Judge Randolph, held in National Association of Manufacturers, et al. v. Securities and Exchange Commission, et al. (Case No. 13-5252), that portions of the SEC’s Conflict Mineral Rules “violate the First Amendment to the extent the [Dodd-Frank] statute and rule require regulated entities 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.’” Noting, among other things, the general humanitarian purpose behind the statute and the desired effects of Congress’ policy choices, the court rejected broader challenges to the Conflict Minerals Rules that asserted the SEC was “arbitrary and capricious” in its rulemaking by not, for example, including a de minimis exception for small amounts of minerals in products. As a result, the Court of Appeals reversed, in part, the district court decision that was the subject of the appeal and remanded the case for further proceedings.

The court’s decision came as no surprise given that the court’s focus on the free speech challenge to the rules and related statutory provisions consumed most of the oral argument held on January 7, 2014. Attorneys for appellants, National Association of Manufacturers (NAM), argued that the offending language in the Rules was akin to a “shaming statute” branding companies with a “scarlet letter” in violation of the First Amendment to the extent they were required to publicly disclose in SEC filings and on their website that certain of their products were “not found to be DRC conflict free.”

April 29, 2014: The Division of Corporation Finance Issues Guidance on Compliance
On April 29, 2014, Keith F. Higgins, the Director of the Division of Corporation Finance (CorpFin) at the SEC, issued a policy statement making it clear that, barring further action by the courts or the SEC itself, CorpFin would not suspend compliance with the SEC’s Conflict Minerals Rules.  The statement released by Director Higgins follows a joint public statement released by SEC Commissioners Daniel M. Gallagher and Michael S. Piwowar on April 28, 2014, evidencing continuing disagreement among SEC Commissioners regarding the Rule and expressing their view that the “entirety of the rule should be stayed, and no further regulatory obligations should be imposed, pending the outcome of the litigation.” 

The statement by Director Higgins confirms that, absent a court-imposed stay, SEC registrants subject to the Rule need to comply with the upcoming May 31st (June 2nd) initial reporting deadline for filing a Form SD to disclose the use of conflict minerals contained in and necessary to the production or functionality of the products they manufacture or contract to manufacture.  The statement also offers the following limited guidance:

  • Companies that do not need to prepare a Conflict Minerals Report (CMR) for inclusion in their Form SD should disclose their reasonable country of origin inquiry (RCOI) “and briefly describe the inquiry they undertook.” (Emphasis added) 
  • Companies that, under the Rule, are required to prepare a CMR should similarly include a description of the diligence undertaken in accordance with the requirements of the Rule.
  • Companies are not required to label their products. Products that are “not found to be DRC conflict free” or “DRC undeterminable” (within the scope of Item 1.01(c)(2) or Item 1.01(c)(2)(i) of Form SD) are not required to be disclosed as such, consistent with the D.C. Circuit’s opinion.  However, companies are advised to disclose (to the extent known): (i) the facilities used to produce the conflict minerals used in the products, (ii) the country of origin of the minerals, and (iii) the efforts to determine the mine or location of origin.
  • Companies may voluntarily disclose whether any of their products are “DRC conflict free;” however, in doing so, an independent private sector audit report (IPSA) must be included as required by the Rule.
  • Consistent with the D.C. Circuit’s opinion and absent further guidance by CorpFin or action from the SEC, an IPSA will not be required unless a company describes products as “DRC conflict free.” 

May 5, 2014: Emergency Motion Filed For Complete Stay of SEC's Conflict Minerals Rule
On May 5, 2014, appellants NAM and others (Appellants) filed an emergency motion with the D.C. Circuit Court of Appeals, seeking a complete stay of the SEC’s conflict minerals rule (Rule 13p-1 under the Securities Exchange Act of 1934, as amended).  The Appellants argued that if companies cannot be required to state whether their products have not been found to be DRC Conflict Free as the circuit court held, then the SEC’s Guidance requiring companies to comply with the remainder of the Rule, notwithstanding its partial invalidation,  no longer serves any of “the overall goals” of the statute. The Appellants further argued that the compelled disclosure invalidated by the circuit court’s decision was the “entire basis” of the Congressional mandate established under Section 1502 of the Dodd-Frank Act. The Appellants noted the joint statement published the week before by SEC Commissioners Gallagher and Piwowar advocating a stay of the full conflict minerals reporting requirement.

May 14, 2014: Circuit Court Denies Emergency Motion to Stay Conflict Minerals Rule
On May 14, 2014, the D.C. Circuit Court of Appeals denied the Appellants’ emergency motion. As a result, the initial deadline of May 31, 2014 (June 2, 2014) for registrants to make disclosures on Form SD remains in effect.

What’s Next?
The debate over the appropriateness of the Congressional mandate imposed on the SEC and compliance with the SEC-adopted Rule and the upcoming filing deadline is expected to continue for many months.  The case will now return to the D.C. District Court for further consideration and, ultimately, unless Section 1502 of Dodd-Frank is repealed, the SEC will be required to propose and adopt a revised Rule.  It remains to be seen whether finality will be achieved prior to the 2015 reporting deadline.  Meanwhile, companies continue to incur significant internal and external costs pursuing compliance with uncertain requirements.

The SEC has indicated that it may yet issue further Form SD disclosure guidance prior to the May 31 deadline, which would be welcomed by all reporting companies and their advisors as companies consider how to prepare purposeful disclosure.  The ultimate answer may be that  disclosures in the initial Form SDs will not be meaningful given that the original “labeling” requirements attendant to the Congressional intent within the statute are not applicable for this year’s report.  Until additional guidance becomes available, however, reporting companies should continue with their conflict mineral diligence and report preparation in line with the guidance issued by Director Higgins on April 29, 2014.

Companies are reminded that, in light of the current SEC guidance (which could be modified at any time prior to the filing deadline), disclosures should focus on a description of the due diligence measures undertaken to identify the source of origin of necessary conflict minerals in their manufactured products, without the need to label or otherwise disclose whether their affected products are “DRC Conflict Free,” “Not Found to be DRC Conflict Free,” or “DRC Conflict Undeterminable.”


Barbara A. Jones
Shareholder, Corporate and Securities Practice Group
Greenberg Traurig

Barbara A. Jones is a shareholder in Greenberg Traurig’s Corporate and Securities practice group, coordinator of the Global Securities group and co-coordinator of the firm’s cross-disciplinary Conflict Minerals Compliance Initiative. 

She maintains a diverse corporate and securities law practice across industry groups, emphasizing complex international and domestic transactions, including private and public financings, IPOs, secondary offerings, dual listings, mergers and acquisitions and licensing transactions. Her work extends to complex regulatory reporting and compliance issues arising in connection with her transactional work and representation of public listed companies, investment banks, financial institutions and private equity groups.  Barbara can be reached at 1.617.310.6064 or

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