Quarterly Accounting Update: Regulatory Update

Court Finds SEC’s Conflict Minerals Rule Violates First Amendment

  • On April 14, 2014, the U.S. Court of Appeals for the District of Columbia Circuit held that parts of the SEC’s rule on conflict minerals and of Section 1502 of the Dodd-Frank Act violate the First Amendment of the U.S. Constitution to the extent that they require regulated entities to report to the SEC and to state on their website that any of their products have not been found to be DRC conflict free.

The court stated that the requirement that an issuer use the particular descriptor “not been found to be DRC conflict free” may arise as a result of the SEC’s discretionary choices, and not as a result of the statute itself. The court held that the statute violates the First Amendment to the extent that it imposes that description requirement.

However, the court rejected the following claims by the appellants regarding the SEC’s rule:

  • The rule should have included an exception for de minimis uses.
  • The SEC’s requirement for due diligence is inconsistent with the statute, and its due diligence threshold was arbitrary and capricious.
  • Applicability to those that contract to manufacture is inconsistent with the statute.
  • The temporary phase-in period is arbitrary and capricious.
  • The SEC did not adequately analyze the costs and benefits of the rule and failed to determine whether the rule would actually achieve its intended purpose.In addition, on May 2, 2014, the SEC issued an order staying the effective date of certain conflict minerals-related portions of Form SD and Rule 13p-1 of the Securities Exchange Act of 1934, which were adopted in accordance with the mandate in Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC ordered this stay in response to the decision made by the U.S. Court of Appeals. The stay was effective immediately pending further judicial proceedings.

SEC Issues C&DIs on Social Media Communications

  • The court remanded the case back to the U.S. District Court for the District of Columbia for further proceedings. However, on April 29, 2014, the staff in the SEC’s Division of Corporation Finance issued a statement indicating that the SEC still expects companies to file any reports (Form SD or a Conflict Minerals Report) required by the rule on or before the June 2, 2014, due date and that those reports should comply with and address the provisions of the rule that the court upheld.
  • On April 21, 2014, the SEC’s Division of Corporation Finance issued the following new Compliance and Disclosure Interpretations (C&DIs) of rules under the Securities Act of 1933, which provide interpretive guidance on communications with security holders or investors through social media outlets:
  • Questions 110.01, 164.02, and 232.15 list limited circumstances in which a registrant would be permitted to supply a hyperlink to comply with certain reporting requirements under the Securities Act.
  • Questions 110.02 and 232.16 clarify that if certain conditions are met, a registrant is not required to ensure that an electronic communication redistributed by a third party complies with the Securities Act.

SEC Issues FAQs on Broker-Dealers

  • In April 2014, the SEC’s Division of Trading and Markets issued two sets of FAQs (April 4th and April 15th) that offer interpretive guidance on certain aspects of the broker-dealer provisions in the Exchange Act. The April 4th FAQs cover questions related to the SEC’s July 30, 2013, final rule on the financial responsibility requirements for broker-dealers (specifically the amendments to Rule 17a-5), while the April 15th set addresses risk management controls for broker-dealers with market access under Rule 15c3-5, as outlined in the SEC’s November 3, 2010, final rule on this topic.

Update to COSO Framework Issued

  • In May 2013, the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission issued its updated Internal Control–Integrated Framework and related illustrative documents.

The updated Framework was written to reflect the changes in business in the two decades since the first version was released in 1992.  The updated framework will permanently replace the 1992 edition on December 15, 2014.  Until then, the original edition can be used.  COSO has indicated that organizations should make the transition to the new framework as soon as they’re able to update their documentation and technology systems, but has recommended that organizations disclose which version is being used.

On December 10, 2013, in a panel discussion, the Division of Corporation Finance noted that Item 308 of S-K requires companies to identify the framework used by management to evaluate the effectiveness of a registrant’s internal control of financial reporting and further noted that if a registrant makes a material change in internal controls (i.e., updating the framework), they should disclose those changes under Item 308(b) of S-K.

The framework also comes with two additional volumes, Illustrative Tools for Assessing Effectiveness of a System of Internal Control, and Internal Control over External Financial Reporting: A Compendium of Approaches and Examples, to help apply the framework.

In February, COSO released a thought paper that addresses how its two frameworks, Internal Control — Integrated Framework and Enterprise Risk Management — Integrated Framework (issued in 2013 and 2004, respectively), can contribute to enhancing organizational performance and governance for sustainable success.


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