Issuers of federally registered securities should take steps now to minimize their risk of liability under the new "conflict minerals" rules under the Dodd-Frank Wall Street Reform Act. The potential risk may be substantially reduced if the issuer uses due diligence now to investigate and document the source of its conflict minerals.
On August 22, 2012, the U.S. Securities and Exchange Commission (SEC) adopted a rule mandated by the Dodd-Frank Wall Street Reform Act that requires issuers to disclose their use of conflict minerals that originated in one of nine "covered countries." The covered countries are the Democratic Republic of the Congo, the Central African Republic, South Sudan, Uganda, Rwanda, Burundi, Angola, Tanzania and Zambia.
The conflict minerals rule applies to issuers that manufacture or contract to manufacture products containing conflict minerals that are necessary to the functionality or production of the product. If the conflict mineral used in a product was not "outside of the supply chain" prior to January 31, 2013, an issuer must undertake a "reasonable country of origin inquiry" (RCOI). Based on the RCOI, if an issuer does not have reason to believe the conflict mineral used came from one of the covered countries, it must file Form SD with the SEC. Alternatively, if an issuer, based on the RCOI, has reason to believe the conflict mineral came from scrap or recycled metal, it must file a Form SD. In either situation, the Form SD should contain the issuer's determination of the country of origin of the conflict minerals and a brief description of the inquiry conducted into the country of origin and the results. However, if the issuer has reason to believe the conflict minerals originated from a covered country, it is subject to more extensive diligence and disclosure duties under the rule.
Civil Liability Under Section 18
Because Form SD and the Conflict Minerals Report are required to be filed with the SEC, an issuer may be subject to liability under Section 18 of the Securities Exchange Act if its Form SD or Conflict Minerals Report contains false or misleading material statements.
Section 18 creates a private right of action for investors. Accordingly, an investor who purchased or sold the issuer's securities may sue for false or misleading material statements in a company's periodic filings with the SEC. However, in order to succeed on a claim, an investor bears a heavy burden of proof: A plaintiff must prove that she did not know the statement was false, that she relied on the statement when making the decision to buy or sell the security and that the fraudulent statement actually affected the price of the security. In short, it is often difficult for a plaintiff to recover on a Section 18 claim.
Furthermore, an issuer will not be liable for misstatements in a document filed with the SEC if the issuer can prove that it acted in good faith and had no knowledge that the statement complained of was false or misleading. Thus, an issuer should document that it used good-faith efforts in its RCOI or when it complied with the more extensive diligence and disclosure requirements, and it should be able to provide documentation or other explanatory evidence about why it drew the conclusions it did.
An issuer need not be overly concerned with Section 18 liability if it performs its diligence inquiries in good faith, does not ignore warning signs indicating that the origin of a conflict mineral is a covered country and documents the evidence and reasoning used in reaching its conclusions.
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On October 5, partner Ellen Knarr served as a panelist at the St. John's University School of Law Women's Leadership Boot Camp, presented by the Women's Law Society.
On January 19, Michael Rave will be speaking at the Economic Leadership Forum, presented by the New Jersey Bankers Association.
Jed Davis was quoted in an article, "5 Ways To Keep Cybersecurity Woes From Derailing A Deal," published in Law360.
David Waizer was quoted in an article, Venture Capital Exec Returns To Day Pitney As Partner, published in Law360.
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Michael Rave was quoted in an article, "Why Small Banks Are Rushing to Issue Subordinated Debt," in American Banker. Community banks are taking on more subordinated debt because interest payments are tax-deductible and the issues help bolster Tier 2 capital ratios, explains Rave in the report. Most buyers are pension funds, mutual funds and other community banks. "There's a lot of interest in them from institutional investors and investment banks are really pushing it," said Rave.
Stamford, Conn., August 24, 2015 - Day Pitney is pleased to announce that 68 attorneys have been selected for inclusion in the 2016 Best Lawyers in America. Best Lawyers ranks lawyers through peer-review surveys, and has been published annually since 1983.