Acting Securities and Exchange Commission Chairman Michael Piwowar announced April 7 that the SEC will suspend enforcement of a “costly” conflict minerals due diligence requirement in the wake of a recent court decision. Piwowar said the SEC will also review whether additional measures are needed. This decision could influence the content of the next conflict minerals disclosures and reports, which are due May 31.

Under the 2010 Dodd-Frank Act and the SEC’s implementing regulations, companies that file reports with the SEC under the Securities and Exchange Act of 1934, whether foreign or domestic, must file a specialized report (form SD) disclosing their use of tantalum, tin, gold, or tungsten originating in the Democratic Republic of the Congo or an adjoining country if those minerals are necessary to the functionality or production of a product they manufacture or contract to manufacture. The minerals at issue are used to make a variety of goods such as cell phones, computers and video game systems, medical equipment, high-speed tools, machine parts, glass, and lamps.

SEC regulations require companies that use any of these conflict minerals to conduct a reasonable inquiry to determine whether they originated in the covered countries. If that determination is negative, or the company reasonably believes its conflict minerals came from recycled or scrap sources, the company must disclose that determination and briefly describe the inquiry it undertook in its form SD.

If the origin inquiry determines that the company knows or has reason to believe that the conflict minerals may have originated in the covered countries, SEC regulations currently require the company to undertake due diligence measures on the source and chain of custody of its minerals, submit a conflict minerals report to the SEC, and provide that report on its website. Due diligence measures must include an independent private sector audit to determine whether the measures taken are in compliance with a recognized framework and consistent with those described in the report. In addition, for products not found to be conflict-free (i.e., that may have directly or indirectly financed or benefited armed groups), SEC regulations require the company to describe those products, the country of origin of the associated conflict minerals, the facilities used to process them, and the efforts taken to determine the mine or location of origin.

However, these disclosure requirements were found to be unconstitutional in an April 2014 decision by the U.S. Court of Appeals for the District of Columbia Circuit. The SEC subsequently issued guidance advising companies that they would not be required to make such disclosures and issued an order staying the effect of those portions of the regulations found to be unconstitutional.

Following an April 3 ruling by the U.S. District Court for the District of Columbia remanding this case to the SEC, Piwowar concluded that the primary function of the “extensive and costly” due diligence requirements “is to enable companies to make the disclosure found to be unconstitutional.” As a result, until these issues are resolved, the SEC’s Division of Corporate Finance said it “will not recommend enforcement action” if otherwise subject companies fail to meet the due diligence (including audit) or related disclosure requirements. However, companies must continue to conduct reasonable country of origin inquiries and file form SD.

In the meantime, SEC staff will work to develop recommendations for possible future changes to the conflict minerals regulations, taking into account among other things the public comments received in response to a Jan. 31 request. It also appears to still be possible that the Trump administration could suspend the regulations entirely for two years if they are determined to threaten U.S. national security interests.

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