Ongoing litigation over the SEC’s Conflict Minerals Rule, as well as the recent election results, has created uncertainty among public companies. Do you know which companies must conduct an independent private sector audit (IPSA) of 2016 Conflict Mineral Reports (CMRs)? If you’re required to complete an audit, it’s due by May 31, 2017.

Understanding the rule

The SEC adopted the rule in 2012 based on concerns that groups in the Democratic Republic of the Congo (DRC) and neighboring countries were exploiting certain minerals (tin, tungsten, tantalum or gold) to finance armed conflict in the region. The rule requires companies to disclose any conflict minerals “necessary to the functionality or production” of their products by filing a Specialized Disclosure Report (Form SD) with the SEC.

Companies that believe these minerals may have originated in the DRC or adjoining countries must conduct additional due diligence to determine whether the minerals were used to finance or benefit armed groups. Depending on the results, a company may need to file a CMR that includes an IPSA. Note that the SEC has suspended the audit obligation for all companies except those that disclose they are conflict free.

Pending litigation

In April 2014, the U.S. Court of Appeals for the D.C. Circuit struck down, on first amendment grounds, a provision in the rule that required companies to disclose whether their products are:

• DRC conflict free,
• Not found to be DRC conflict free, or
• DRC conflict undeterminable.

Two rehearings later, the decision stood. In March 2016, the government announced that it wouldn’t seek U.S. Supreme Court review.

The case was remanded to the trial court, with instructions to take action consistent with the appellate court’s ruling. It’s uncertain how the trial court will proceed or how long it will take before the case is resolved.

Moving forward

Shortly after the appellate court announced its decision, the SEC indicated that companies wouldn’t be required to make disclosures found to be unconstitutional. In addition, no IPSA is required unless a company voluntarily elects to describe any of its products as “DRC conflict free” in its CMR. As of this writing, the statement remains in force, and there’s no reason to believe that the SEC will reinstate mandatory IPSA requirements before the May 31, 2017, filing deadline.