As is generally known, the corporate disclosure and auditing requirements of Dodd-Frank Section 1502 are to start “with the [company’s] first full fiscal year that begins after the date of promulgation of such regulations.” Therefore, the timing is a function of both the corporate fiscal year as well as the date of promulgation. In the wake of SEC moving the window for promulgation of the final conflict minerals rule to between January – June 2012 (with many sources indicating the end of January), we asked several notable legal experts to offer their thoughts on how (or if) this delay would impact publicly traded companies that operate on a fiscal year other than the calendar year.
If the rule is indeed promulgated in January, how might a company with a March – February or July – June fiscal year be impacted for 2012? Would it be plausible to satisfy the CMR reporting requirement with a short summary report on due diligence process development/implementation status that will likely be lacking in significant detail?
K. Russell LaMotte is a Principal at Beveridge & Diamond, PC in Washington DC. He previously served as a senior lawyer at the State Department. His practice focuses on counseling multinational corporations and trade associations on environmental compliance and market access requirements related to product design and supply chain management. He can be contacted at RLaMotte@bdlaw.com.
The timing issue is not really a function of the SEC missing the end of December timetable as such, but rather a function of the statutory language that mandates the reporting period to start for each issuer in the first fiscal year following promulgation of the final rules. Under this staggered reporting structure, some issuers are by definition going to be disadvantaged compared to other issuers, no matter when the SEC issues its final rules.
The best way to mitigate that impact would be if the SEC adopted in its final rule one or more of the “transitional” mechanisms or alternative timing mechanisms that have been proposed. For example, one approach that would mitigate the inequity of the staggered reporting period, as well as confer significant efficiency benefits in terms of reducing the burden on suppliers, would be if the SEC adopts the suggestion made by several commenters (including a multi-stakeholder group involving both industry and NGOs) to synchronize the reporting period for all issuers on a calendar year basis. Another approach that would mitigate this unfairness would be if the final rule permitted issuers to utilize an “indeterminate origin” category that did not trigger the conflict minerals reporting duty, perhaps for a initial period. Commenters have pointed out that even where such proposals are in tension with the language of the statute, the SEC arguably has flexibility under the general authority granted to by Section 36 of the Securities Exchange Act, which permits the SEC to make exemptions from provisions of the Act “to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.”
If the SEC does not take up these useful suggestions, however, then it is likely that the first filers of CMRs will be disadvantaged. If that happens, it will be natural that the level of depth and rigor of those early reports will likely be thinner than those that come later. Moreover, I think that the SEC will fully expect that to be the case. The CMR will have to include more than just a short summary of the due diligence efforts (there are several specific elements to a CMR that are specified in the statute in addition to a description of the DD measures), but I think that the SEC has signaled in its proposed rule, and in comments that staff made at the Roundtable, that they expressly view due diligence as an evolving standard that will vary over time and presumably get more sophisticated as additional resources and information on sources and supply chains becomes available. So although the idea of a “short status report” may not be sufficient, the basic concept that initial reports are likely to be less complete and comprehensive than later reports is likely to be an inherent aspect of the program as it gets off the ground.
Mr. Jeff Perry is an associate attorney in King & Spalding’s Washington, D.C. office, specializing in energy and natural resources industry-related regulatory matters. In addition, he serves as co-editor of his firm’s monthly Energy Newsletter. He can be contacted directly at email@example.com. The views he expresses below are his own.
Delays by the SEC in promulgating the final rules further continues to fuel speculation as to the compliance burdens the rules are likely to impose on affected companies, and when.
Unless the final rules contain a phase-in provision, as some have recommended, companies with fiscal years that commence in the first half of the calendar year face the prospect of furnishing the inaugural disclosures under this new regime in 2013. For these companies, being positioned early in the calendar year carries with it the prospect of unenviable celebrity, as the conflict minerals rules contemplate public disclosure through a company’s annual reports and on its corporate website as a mechanism to compel corporate action to curb the use of materials that “directly or indirectly finance or benefit armed groups” in the DRC countries.
Hurry Up and Wait
Some companies have taken action to fill the vacuum left by the absence of government action by issuing statements of corporate principles on conflict minerals or through participation in industry working groups that seek to address common issues. Others quietly are taking stock of their supply chain management procedures and practices in preparation for the issuance of final rules. Undoubtedly, there are some companies who remain unaware that they will be impacted by the final rules: they face an interesting year.
The vigorous debate in the year since the SEC proposed rules implementing Section 1502 should be viewed as largely constructive, but it has also increased the level of uncertainty surrounding the costs and mechanisms of eventual implementation. Paradoxically, companies with the potential to be affected by the conflict minerals rules face greater difficulties in charting a course of action now than they did a year ago. They are confronted by a growing range of interpretations of the proposed rules and yet lack a key source of guidance, the final rules.
Sarah A. Altschuller and Gwendolyn W. Jaramillo, Foley Hoag LLP are attorneys in the Corporate Social Responsibility (CSR) practice at Foley Hoag LLP. They advise multinational companies regarding the management of legal and reputational risks through the development and implementation of CSR strategies, policies, and procedures. They also counsel clients on compliance with U.S. export regulations and sanctions programs, including product classifications, development of compliance programs, compliance audits, and compliance with OFAC regulations. They can be reached at SAltschuller@foleyhoag.com and firstname.lastname@example.org.
With a final rule now delayed again, issuers currently subject to the legislation must evaluate how to prepare for the future disclosure requirements. Notably, the SEC’s announcement indicates that the January – June 2012 window “is an estimated timeline and may be subject to change.”
Looking ahead, and based on previous experience, it is most likely that the SEC will introduce a phased approach for disclosures, whereby certain initial disclosures will be required in the first reporting year that will need to be augmented in subsequent years. Many stakeholders have urged the SEC to adopt a phased approach in comments to the proposed regulations issued in December 2010. Groups calling for a phased approach include the U.S. Chamber of Commerce, the National Association of Manufacturers, and the House Financial Services Committee. This could logically take the form of requiring larger issuers to fully comply in the first year following the issuance of the final rule, while giving smaller issuers the benefit of more time to comply. This approach has been used in several prior instances, including: the requirement for the inclusion of XBRL (eXtensible Business Reporting Language) data files in corporate filings; and the requirement, pursuant to Section 404 of the Sarbanes-Oxley Act, for an independent auditor’s report on the effectiveness of internal controls over financial reporting (although the requirement for smaller companies was eliminated by Dodd-Frank).
If the rule is issued in the next few months, issuers with fiscal years beginning in March/April or June/July would be required to issue their first reports in early to mid-2013. Issuers may fear being required to report on due diligence efforts undertaken during a time period unguided by final regulations, but that appears unlikely based on the language of Section 1502. That said, however, issuers with fiscal years beginning soon should be prepared to hit the ground running and ideally will have identified appropriate internal groups or departments who would be charged with collecting the required information in order to facilitate full compliance.
Brian Breheny is a corporate partner in the Washington, DC office of Skadden, Arps, Slate, Meagher & Flom LLP and the former deputy director for legal and regulatory policy in the SEC’s Division of Corporation Finance. He concentrates his practice in the areas of mergers and acquisitions, corporate governance, and general corporate and securities matters. Mr. Breheny can be reached at Brian.Breheny@skadden.com.
I believe the SEC will provide some transition relief for non-calendar year companies. The SEC staff members who are responsible for preparing the final rules have consistently stated publicly that they are mindful of the need to give companies adequate time to prepare for compliance with the rules. It is difficult to predict, however, whether that relief will be a wholesale pass from the conflict minerals reporting requirements for any company with a fiscal period beginning in 2012 or whether the SEC will choose some future date, post-approval of the rules, to begin requiring compliance with the rules. If they take the latter approach, the SEC could pick a longer than traditional number of days, say 120 or 150, before the rules go into effect. This additional period would give companies time to prepare for compliance with the rules. Remember, the SEC is in the unfortunate position of trying to balance the compliance concerns of companies with the desires of the legislators who advocated the conflict minerals rules. I think the delayed effectiveness approach may be easier to administer and more palatable to some of the interested parties, than allowing summary reporting in year one.