The "DRC Conflict Undeterminable" determination, widely employed in conflict minerals reports to date, will not be permitted for issuers (other than small companies1 reporting in 2016 on activities in calendar year 2015. At the same time, court decisions result in issuers also not needing to characterize their products vis-à-vis conflict minerals in other ways ("DRC conflict free," "not been found to be "DRC conflict free"). If an issuer voluntarily elects to describe a product as "DRC conflict free" in its Conflict Minerals Report ("CMR"), the issuer must ensure that it has completed an independent private sector audit ("IPSA") of the CMR. Unless the SEC issues contrary guidance in coming months, no other issuers will be required to go through an IPSA.
An IPSA is to opine on whether the design of an issuer's conflict minerals due diligence measures conforms materially to criteria of a recognized due diligence framework used by the registrant, such as the due diligence guidance approved by the Organization for Economic Co-operation and Development, and whether the issuer's description of its due diligence measures is consistent with the due diligence process that the registrant undertook.
Conflict Minerals Reporting
SEC rules for conflict minerals require that public companies disclose specified types of information relating to conflict minerals used in their products. First, each issuer must determine whether conflict minerals are necessary to the functionality or production of a product that an issuer manufactures or contracts to manufacture. Second, issuers that determine that they are subject to the conflict minerals rules must conduct, in good faith, a country of origin inquiry to determine whether their conflict minerals originated in the Democratic Republic of the Congo or an adjoining country ("Covered Countries") or are from recycled or scrap sources. They must report the results of their inquiry on a Form SD filed with the SEC and on their website. Third, an issuer that has reason to believe that its conflict minerals originated in one or more Covered Country and are not from recycled or scrap sources must exercise due diligence on the source and chain of custody of the conflict minerals. If the conflict minerals originated in Covered Countries and did not come from recycled or scrap sources, the issuer must file a CMR with the SEC and publish the CMR on its website.
Conflict Minerals Reporting Requirements During Grace Period
SEC rules include transition requirements for all issuers' reporting on conflict minerals usage in calendar years 2013 and 2014 and transition requirements for smaller issuers' reporting on conflict minerals usage in 2015 and 2016. If transition requirements apply, issuers are permitted to describe their products as "DRC conflict undeterminable" if they were unable to determine the source and chain of custody of conflict minerals in a product (including whether or not such conflict minerals came from a Covered Country), or whether conflict minerals in the product financed or benefitted armed groups in that region. Also, such issuers are not required to obtain an IPSA regarding their CMR, but they are required to file a CMR as an exhibit to Form SD describing their due diligence. They are also required to describe the steps they have taken or will take, if any, since the end of the period covered by their most recent prior CMR, to mitigate the risk that their necessary conflict minerals may benefit armed groups, including any steps to improve their due diligence. These requirements seem to preclude an issuer from simply deciding to file as "DRC conflict undeterminable" without expending some level of due diligence effort.
Post-Grace Period Reporting Requirements
For purposes of reporting in 2016 on events in 2015, issuers must file a CMR as an exhibit to Form SD if they are not smaller reporting companies that are unable to determine that their conflict minerals did not originate in the Covered Countries, or if they are unable to determine that their conflict minerals that originated in the Covered Countries did not directly or indirectly finance or benefit armed groups. The CMR is to include a description of the products, facilities used to process the necessary conflict minerals in those products, the country of origin of the necessary conflict minerals in those products, and efforts to determine the mine or location of origin with the greatest possible specificity.
In light of a recently confirmed court decision, 2the SEC has advised that issuers generally must continue to comply with conflict minerals reporting requirements, except that they need not observe rules that mandate an express characterization of products' status vis-à-vis conflict minerals. Specifically, the SEC advised that:
Orrick continues to monitor guidance from the SEC as we move closer to the May 2016 deadline for conflict minerals reporting regarding activity in 2015. Issuers are well-advised to prepare far in advance for the breadth of work that goes into investigating their supply chains and obtaining an IPSA, if needed, and to start preparation for reporting in 2016 early. Even though an IPSA is currently not required unless issuers voluntarily elect to describe their products as "DRC conflict free," it may be wise to consider instituting an auditing process to improve due diligence practices.
1 "Smaller reporting companies" are generally defined as those having a public equity float of less than $75 million as of the last business day of the most recently completed second fiscal quarter or, for companies without a calculable public float, those whose revenues were below $50 million for their most recently completed fiscal year.
2 On August 18, 2015, a three-judge panel of the D.C. Circuit Court of Appeals affirmed that it would adhere to its original decision that portions of the Dodd-Frank Act, under which the SEC rule was promulgated, and the SEC's final rule "violate the First Amendment to the extent the 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."'" At the time of this alert, the SEC has not yet responded to this decision or issued any guidance.