Many domestic and foreign companies that file periodic reports with the US Securities and Exchange Commission (“SEC” or “Commission”) are now coming to grips with three novel and highly prescriptive disclosure requirements dictated by Congress. What distinguishes these new requirements from most, if not all, existing securities disclosure standards is their unique focus on achieving humanitarian and/or foreign policy objectives that are largely unrelated to the central purposes of the federal securities laws – the protection of investors and the facilitation of efficient capital formation and secondary market trading through full and fair disclosure. Two “miscellaneous” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) instruct the SEC to adopt rules: (1) under Section 1502, to require public companies to disclose the use in their products of specified “conflict minerals,” as a means of “further[ing] the humanitarian goal of ending the extremely violent conflict in the DRC [Democratic Republic of the Congo], which has been partially financed by the exploitation and trade of conflict minerals originating in the DRC;” and (2) under Section 1504, to “increase the transparency of payments made by oil, natural gas and mining companies to governments for the purpose of the commercial development” of these natural resources, thereby “help[ing] to empower citizens of these resource-rich countries to hold their governments accountable for the wealth generated by those resources.”

Although they became effective on November 13, 2012, the SEC’s final rules implementing Sections 1502 and 1504 of the Dodd-Frank Act do not compel the filing of a disclosure document with the SEC until the first half of 2014, pursuant to a new Form SD (for “Specialized Disclosure”). In the meantime, some business organizations have brought suit to challenge the validity of both the conflict minerals and resource extraction payment rules adopted by the SEC.  At this point, it is difficult to predict whether either or both sets of rules will be invalidated upon judicial review.  Accordingly, companies potentially affected should proceed with efforts to determine whether they are covered by either of the new rules and, if so, what investments will need to be made, and resources deployed, to ensure timely compliance.

Another federal statute, the Iran Threat Reduction and Syria Human Rights Act of 2012 (“Iran Threat Reduction Act”), mandates (among numerous other items) disclosure, in periodic reports “required” to be filed after February 6, 2013, of whether the registrant or any of its affiliates “knowingly” engaged in certain enumerated activities involving Iran that could expose the registrant to the imposition of sanctions by the US government. If a registrant determines that it, or any of its affiliates, has engaged in such activities, the registrant must provide specified information both in the relevant periodic report, and in a separate notice that must be filed concurrently with the SEC. Although no SEC rulemaking is necessary to implement this provision, the statutory language does not foreclose the possibility of SEC or Staff interpretive guidance. In fact, the SEC’s Division of Corporation Finance recently answered several important interpretive questions raised by Section 219, as discussed below. Perhaps most important among them are two Staff interpretations indicating that: (1) companies whose next annual (or quarterly) report is due after February 6, 2013 (meaning that the filing deadline falls after the statutory effective date), may not avoid compliance with Section 219 simply by filing their reports in
advance of the February 6 effective date; and (2) the statute, which became law in August 2012, has a retroactive effect; as a result, calendar-year registrants will have to review their own activities, as well as those of US and non-US affiliates, beginning January 1, 2012.

All three statutes addressed in this article amend Section 13 of the Securities Exchange of 1934, as amended (“Exchange Act”), which means that violation of any of this triad of new disclosure requirements potentially could result in SEC enforcement action. And all three will compel domestic and foreign registrants to make difficult judgments as to whether they are covered and, if so, how best to design and implement disclosure controls and procedures necessary to ensure that the required information is collected, analyzed, and reported within the specified time periods. Of the three, the conflict minerals provisions implemented by SEC rulemaking may affect the most issuers – approximately 6,000, according to an SEC estimate.

The full article, available here, analyzes each of the three new “specialized” reporting obligations, and offers some practical suggestions on what to do now and where to look for additional guidance. Companies should recognize that there is no realistic way to truncate the highly fact specific and individualized analysis demanded by these novel disclosure requirements. On the other hand, a company that takes the time and trouble to engage in this analysis may find, for example, that the availability of generous “grandfather” provisions under the conflict minerals rule, or the application of the de minimis threshold for disclosure of governmental resource extraction payments, may lead to reduced costs and other burdens. It remains to be seen whether these unprecedented amendments to the federal securities laws represent aberrations or, instead, signal the emergence of a trend. Because legislatures and/or regulators in other countries are considering similar requirements, however, compliance with disclosure rules designed to achieve social and/or foreign policy goals without regard to the possible impact on companies or their investors eventually may become an unavoidable cost of doing business on a global scale.