Tuesday, May 09, 2017

Apple conflict minerals report among first bellwether documents after new guidance

By Mark S. Nelson, J.D.

Apple Inc. filed its latest conflict minerals report late last week, making the company one of the first bellwether firms to report after the SEC’s Division of Corporation Finance issued revised guidance in April following a request by then-Acting Chairman Michael Piwowar. Forms SD are due by May 31, but the new CorpFin guidance sates that the Division will not recommend enforcement to the Commission if a company does not include the due diligence portion otherwise required by Item 1.01(c) of Form SD.

Apple conflict minerals report. Apple, through its Form SD and conflict minerals report filed April 5, continues to assert that it employs modes of tracking its conflict minerals supply chains beyond what is legally required. The company boasted that for the second consecutive year all its identified smelters and refiners (250 total) participated in an independent third-party audit program. Apple said that its due diligence conformed to the Organization for Economic Co-operation and Development’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.

According to Apple, it places significant emphasis on tracking incident reports. Apple observed that 15 of 1,300 such incident reports were possibly linked to armed groups, which are the focus of the SEC’s conflict minerals rule. The company said local officials followed-up on five incidents, while other incidents resulted in improved mine security. Several incidents were still under investigation, including two incidents regarding gold that are under review by the London Bullion Market Association. Apple later noted that it could not determine if its products contained specific minerals related to the 15 incident reports.

A review of the SEC’s EDGAR database revealed eight companies had filed conflict minerals reports between January 1 and May 8 of 2017. Companies in addition to Apple that filed conflict minerals reports include: Sphere 3D Corp.; Quantum Corporation; Amerityre Corporation; O2 Micro International Limited; Jason Industries, Inc.; Babcock & Wilcox Enterprises, Inc.; and KEMET Corporation. Several other bellwether companies, including Intel Corporation, have yet to make their latest filings.

CorpFin guidance. This year’s Forms SD will require companies to navigate two sets of guidance, one issued in April 2014 that provides detailed information about CorpFin’s expectations for conflict minerals filings, and more recent guidance issued in April 2017 announcing that the Division “will not recommend enforcement action to the Commission if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD.”

The D.C. District Court has remanded the conflict minerals rule to the Commission regarding the portion of the rule previously held to violate the First Amendment. The latest SEC guidance explicitly warns that it is subject to further Commission action, addresses the Division’s view of enforcement only, and is not a legal conclusion regarding the conflict minerals rule.

The SEC’s conflict minerals rule, which has a lengthy and controversial history, also can result in liability for filed documents under Exchange Act Section 18. Moreover, the SEC’s rule contains special provisions for mergers and acquisitions. The Form SD recently filed by Intertape Polymer Group Inc. exemplifies usage of the delay provision applicable in the M&A setting.

Many firms may elect to make the disclosures they would have made even without the new CorpFin guidance because they were well along in the reporting process and to satisfy their environmental, social and governance constituencies. Companies also may be looking ahead to when similar European rules become effective in January 2021.