EU Conflict Minerals Regulation — Source Intelligence Webinar

Dynda Thomas will be participating in a Source Intelligence-hosted webinar titled “EU Conflict Minerals:  When, What and How to Comply.” She will discuss the key provisions and the status of the proposed EU regulation and how to build your compliance program so that you are ready when the regulation is adopted (likely later this year).  Other speakers include:  Leah Butler (Electronic Industry Citizenship Coalition-EICC) and Lina Ramos (Source Intelligence).

The webinar is set for Tuesday, February 2, 2016 at 11:00 Central European Time (CET).

Click here to register:  Webinar Registration

Cobalt and Conflict Minerals — 3TG and C?

Companies and industry groups have been working for over 3 years on investigation and due diligence processes to determine the source and chain of custody of the tin, tantalum, tungsten and gold (3TG) in their products.   But, there could now be pressure to add to the list of conflict minerals.  Compliance Week raised this question last week in its article “Is Cobalt the Next Conflict Mineral?”

In addition to the long-time focus on 3TG, NGOs and human rights advocates have also been concerned with cobalt mining in the Democratic Republic of Congo (DRC).  Amnesty International’s recent report “This is What We Die For” includes a lengthy and detailed analysis of cobalt mining in the DRC and human rights conditions in those mining operations (including the health risks and dangers associated with artisanal cobalt mining and the prevalence of the worst forms of child labor in those operations).  Amnesty International’s report concludes that governments should include cobalt in their required due diligence and reporting on mineral supply chains.

The report’s specific focus on worker safety and child labor is very different from previous DRC minerals-related reports that focused more on the financing of armed groups that use violence against civilians to control territory.  If nothing else, this report demonstrates that the push for conflict minerals supply chain transparency can pivot to increased attention on child labor and worker safety in mining operations, which are also serious concerns in the mining of 3TG.

Could cobalt be added to the definition of “conflict minerals” under the SEC’s conflict minerals rule?  It seems unlikely to occur as a result of new legislation.  As currently configured, Congress does not appear to have the appetite for adding to the conflict minerals legislation at a time when there is genuine disagreement as to whether the conflict minerals rule is accomplishing its goals.  But, the rule itself leaves open the possibility of adding to the list of conflict minerals.  In the SEC’s release that accompanied the final conflict minerals rule, conflict minerals is defined as tin, tantalum, tungsten, gold “or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the Covered Countries.”  The Amnesty International report could be intended to be support for such a determination by the US Secretary of State.  A determination that cobalt is financing conflict in central Africa would be consistent with other actions by the Obama Administration regarding human rights and the mineral trade in the DRC.

Of course, adding cobalt to the definition of conflict minerals would impact companies that are working to gather sourcing information about the 3TG in their products.  And, those companies that are now able to (or soon hope to) identify products as “DRC conflict free” would suffer a set-back as they would need to undertake a whole new line of investigation on cobalt and would not be in a position to claim “DRC conflict free” status until that is accomplished.

Companies in the electronics industry have invested significant time and effort in certifying the smelters and refiners of the 3TG in their products, and the electronics industry is widely recognized as the market leader for its accomplishments in increasing supply chain transparency.   Notably, earlier this month, Intel announced that it is now manufacturing “conflict-free” microprocessors.  And, the company went on to commit that its broader product base would also be “conflict-free.”   But, adding cobalt to the SEC’s definition of conflict minerals would mean starting over, at least with respect to cobalt in Intel’s supply chain.  And, adding cobalt to the list of conflict minerals could jeopardize the momentum finally being gained in the education of suppliers and the public about conflict minerals.  Intel’s recent survey of millenials’ attitudes towards conflict minerals indicated that a surprising number of people still do not fully understand the conflict minerals issue or what efforts industry has undertaken toward responsible minerals sourcing.  Naming cobalt a conflict mineral could create more confusion and would require companies who previously claimed “DRC conflict free” status to amend that claim until they can confirm that status as to cobalt.

But, even if cobalt is not added to the SEC’s definition of conflict minerals, NGOs could pressure companies to include cobalt in their disclosures.  NGOs have already made it clear that they expect companies to do more and disclose more than is required by the conflict minerals rule.  They urge non-reporting companies to develop policies and publish information about their supply chains. They also urge companies to take “good practice” steps that are over and above what is required by the rule.  NGOs have gained power and influence around the conflict minerals issue as they have scored company supply chain disclosures and called out industries and specific companies as laggards.  By doing so, they have provided potential plaintiffs with a road map to legal claims.  And as “consensus” develops around additional issues of concern, NGOs are likely to pressure companies to address these issues in their supply chain investigations and to include them in their disclosures.  As we have seen in the last six months as companies are facing class action consumer fraud claims based on their supply chain disclosures, more supply chain transparency disclosure means more risk.

The increased focus on cobalt illustrates why companies are well advised to develop due diligence processes and procedures that can be built upon and that address the risks in their own individual supply chains — based on their geographies, industries and products and not just based on the specifics of current government regulation.

Resource Extraction Payment Disclosure Rule — You Have More Time To Comment

In a January 21, 2016 release titled Extension of Comment Period for Disclosure of Payments by Resource Extraction Issuers, the Securities and Exchange Commission extended the comment periods for the revised proposed Rule 13q-1 (and the related amendment to Form SD).  That proposed rule relates to the disclosure of payments by resource extraction issuers in connection with the commercial development of oil, natural gas, or minerals around the globe.  As we discussed in our post of December 11, 2015, the SEC originally provided an initial comment period ending on January 25, 2016 and a reply comment period ending on February 16, 2016.  The Commission has now extended the initial comment period to February 16, 2016 and the reply comment period to March 8, 2016.

Remember, all comments will be posted on the SEC’s web site.  And, the SEC may add its own additional materials as well. 

Slavery and Human Trafficking — How to Build Your Compliance Program

The California Transparency in Supply Chains Act of 2012 (“California Act”) applies to retailers and manufacturers with annual worldwide gross receipts over $100 million that are doing business in California. Those entities are required to disclose (by statements posted on their websites) their efforts to eradicate slavery and human trafficking from their direct supply chains for goods that are offered for sale. These disclosure requirements are currently in effect.

The UK Modern Slavery Act 2015 (“UK Act”) became effective on October 29, 2015 and is broader than the California Act. It requires sellers of products or services with annual turnover of £36 million (approximately $56 million) that carry on a business or part of a business in the UK to disclose their efforts to eliminate slavery from their operations and from all of their supply chains (not just from their direct supply chains). The disclosure required by the UK Act is also a statement that is posted on the company’s website. The earliest required posting of these statements is required by October 31, 2016 (for companies with financial year-ends on March 31, 2016).

What steps should a company take to develop its initial slavery and human trafficking compliance program? Or what steps should a company take to expand its existing compliance programs to meet the various slavery and human trafficking requirements in an effective, efficient way?

You should consider some of these best practices in building your own compliance program.

Conflict Minerals — For European Companies That Haven’t Started The Process, Here’s How To Build Your Compliance Program

When the US Securities and Exchange Commission’s conflict minerals rule was issued in 2012, US reporting companies (and their suppliers) developed and implemented conflict minerals compliance programs. Companies have continued to enhance and beef up their programs since then. Now, companies should be supplementing their compliance programs to be ready to address the requirements of the EU conflict minerals regulation when it is finally adopted.

The EU regulation, as currently proposed, will impact hundreds of thousands of European companies – many more than are covered by the US rule. And the proposed EU regulation has a much wider geographic focus than the US rule. So, what steps should a company take to develop its initial conflict minerals compliance program? Or what steps should a company take to quickly expand its existing compliance program to fulfill the likely requirements of the EU regulation?

You should consider some best practices in building your own compliance program.  We’ve attached some topic areas to keep in mind. You can use them to organize your planning.

Here We Go Again — New Proposed Resource Extraction Payment Rules

As we discussed in posts on September 3, 2015 and on October 2, 2015, Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC to issue resource extraction payment rules.  The purpose of those rules was to promote the federal government’s desire for transparency about resource extraction payments made by commercial entities to governments around the world.   The initial rules were issued by the SEC on August 22, 2012.  After a legal challenge by the American Petroleum Institute, the initial rules were struck down by the D.C. district court on July 2, 2013.  The court remanded the rules to the SEC to address what the court said were two flaws:

  • the rules required full public disclosure of the reports submitted to the SEC, and
  • the SEC did not provide for an exemption from the requirements when the disclosure about extraction payments was prohibited by the relevant foreign government.

Time passed and interested parties waited for the SEC to issue revised proposed rules.  Finally, on September 18, 2014 (more than a year after the rule was struck down), Oxfam was tired of waiting and filed an action to compel the SEC to issue revised proposed rules by a certain date.  On September 2, 2015, nearly a year after Oxfam filed that action, a federal judge gave the SEC a deadline of October 2, 2015 to file an “expedited schedule” for issuing the final resource extraction payment rules.  As required, the SEC filed its expedited schedule on October 2 and committed to issue revised proposed rules by December 31, 2015.  On December 11, 2015, almost 3 weeks ahead of schedule, the SEC issued revised proposed resource extraction payment rulesInitial comments on the proposed rules are due by January 25, 2016. Reply comments are due by February 16, 2016.

Who would be covered by the proposed rules?

An issuer that:

  • is required to file annual reports under the Securities Exchange Act, and
  • engages in the commercial development of oil, natural gas, or minerals.

Payments made by subsidiaries or other entities controlled by the reporting company would also be included in the disclosure.

What would have to be disclosed?

The issuer would have to disclose certain payments made to a foreign government, a foreign subnational government (like a province or other administrative division), or to the US federal government.  Disclosures would be required for:

  • payments made for the “commercial development of oil, natural gas, or minerals that are “not de minimis.

“Commercial development of oil, natural gas, or minerals” includes: exploration, extraction, processing, export, or acquisition of a license for any of those activities.

“Not de minimis”  is any payment, individually or in a series of related payments, of $100,000 or more during a fiscal year.

The types of payments to be disclosed would include:  taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends, and payments for infrastructure improvements.  Note: these are valid and legal payments.   The focus of the resource extraction payment rules is not bribery or anti-corruption.  Instead, the focus is transparency and making the payment information publicly available in order to pressure the governments receiving these payments to use them for legitimate purposes.

The proposed rules include a long list of detailed information that must be disclosed about the payments made, including: type and total amount of payments for each project, type and total amount of payments to each government, total amounts by category, currency used, relevant financial period, business segment making the payment, government and country receiving the payment, projects to which the payments relate, the resource being developed, and the geographic location of the project.  This information would be provided in an interactive data format.

Importantly, the rules would give the SEC the authority to allow exemptions from the requirements on a case-by-case basis.

The SEC intends for these resource extraction payment rules to be consistent with the Extractive Industries Transparency Initiative and with similar rules already adopted by Canada and the EU.   In fact, the rules would allow issuers to use reports prepared for other regulatory purposes to fulfill their requirements under the SEC rules as long as the requirements are “substantially similar.”

How would the disclosure be made?

The proposed rules would require the issuer to disclose the relevant payment information by an annual filing with the SEC on an exhibit to Form SD (the form that is currently used to house conflict minerals disclosure).   The filing would be required no later than 150 days after the end of the issuer’s fiscal year.

The deadline for initial comments to the revised proposed rules is January 25, 2016.  Reply comments are due by February 16, 2016.  We will continue to monitor this proceeding and will provide updates throughout the rule-making process.

Conflict Minerals Rehearing Denied — Is the Legal Challenge Over?

In a summary order handed down yesterday, November 9, 2015, the Court of Appeals for the D.C. Circuit rejected the petitions of the SEC and Amnesty International for a rehearing en banc of the Court’s August 2015 opinion (which reaffirmed its prior ruling that a small portion of the Conflict Minerals Rule violates the First Amendment). So, is the legal challenge over?  The short answer is “no.”

Possible Appeal to Supreme Court — In its pleadings, the SEC argued that the Court of Appeals rulings (both the one from April 2014 and the one from August 2015) conflict with Supreme Court precedent on compelled commercial speech and expressed concern about the impact of the rulings on other SEC disclosure requirements.  In light of those concerns (but not because of any overall support for social-goal oriented disclosure requirements), it seems likely that the SEC will appeal the ruling to the Supreme Court.   Since the August 2015 decision, there has been a lot of commentary by non-governmental organizations (NGO’s) and other advocates expressing disagreement with the First Amendment ruling.  But, interestingly that commentary focuses more on the impact of the First Amendment ruling on SEC disclosure requirements in general than on the importance of the specific product descriptor that was found to be unconstitutional.

Remand to the District Court —  If yesterday’s ruling is not appealed or if the appeal is rejected, the matter would go back to the U.S. District Court “for further proceedings.”  Those proceedings could be a simple recognition that one problematic product descriptor is not required, along with a remand of the rule to the SEC for revision in accordance with the rulings.   However, some are proposing that when the case is remanded to the U.S. District Court, the parties might seek to have other issues considered, a fight that would extend the legal challenge even further.

Timing? — What is clear is that whether or not the case is successfully appealed to the Supreme Court, a conclusion to the legal challenge of the Conflict Minerals Rule is still a long way off.  But, note that the rejection of the petitions for rehearing en banc is not a reason for companies to slow their inquiry or diligence efforts.  The April 2014 SEC Statement (as implemented by the SEC’s partial stay of the rule) continues to express the  SEC disclosure requirements for the year 3 reporting due by May 31, 2016.

Problematic Product Descriptor Here To Stay? —  While the legal challenge was underway, a number of NGO’s made it clear that they expect companies to use the very product descriptor that the Court of Appeals determined to be unconstitutional.  NGO groups that have scored and reported on some or all of last year’s SEC conflict minerals filings have stated that they will award “points” in their scoring systems to companies that use the problematic product descriptor in their disclosures.  So, even if the SEC is ultimately required to change the rule to remove that specific disclosure requirement, the NGO’s will likely continue to pressure companies to use that product descriptor.  The NGO’s are requiring what the Government cannot.

Move UK Slavery and Human Trafficking Compliance to the Top of Your To-Do List

On October 29, 2015, the UK Government issued Guidance on the requirements of the Modern Slavery Act.  The UK Modern Slavery Act requires many commercial organizations doing business in the UK to post a slavery and human trafficking statement on their homepages.  It is now clear that those businesses (especially those with year-ends on or after March 31, 2016) need to turn their attention to slavery and human trafficking compliance right away.

The first question that most entities are asking is when the statements must be posted.  Answer:

  • for a business with a year-end on or after March 31, 2016, its initial statement will cover its actions in the 2015-16 financial year (that is, this current year), and it will be among the first businesses to have to post statements.
  • for a business with a year-end on or before March 30, 2016, its initial statement will cover its actions in the 2016-17 financial year, and it will be able to delay posting its statement.

So, depending on your year-end date, you may have much more time before a statement must be posted.  For example, a business with a financial year-end of December 31, 2015 will cover the financial year ending December 31, 2016 in its first statement (posting no later than June 30, 2017).

However, a business with a financial year-end of April 30, 2016 will have to post its first statement covering the 2015-16 financial year (posting no later than October 31, 2016).

But, don’t be lulled by the October 2016 posting date.  Businesses with a financial year-end on or after March 31, 2016 actually have very little time to prepare their statement — and less time to develop, initiate, or enhance their human trafficking-related supply chain activities if they choose to do so during this current financial year.  Those already working on supply chain transparency know the time and effort required to set policy, engage with suppliers, provide training, and prepare responses to customers.  And developing remedial action plans may take even longer.

And, the businesses that have the early posting requirements must be aware that their statements will be posted (and therefore will be publicly available, reviewed, reported, scored and discussed) many months before other businesses’ statements are due.  Businesses with a year-end date before March 31, 2016 have a great advantage under this Guidance because they will be able to learn valuable lessons from the experience of the early filers.

Unlike other supply chain disclosures, the UK Modern Slavery Act does not set a date certain for when the statement must be posted each year.  But, the Guidance indicates that businesses are expected to publish their statements “as soon as reasonably practicable” after the end of the financial year and in all cases no more than six months after the year end.

In addition, the UK Government has also published a practical guide for affected businesses including “guidance” on what should be included in a slavery and human trafficking statement.   It is similar to, though much less detailed than, the California Resource Guide published in connection with the California Transparency in Supply Chains Act (which was a model for the UK Modern Slavery Act).

We have published an updated briefing note summarizing the steps that businesses should be taking now to prepare for this new obligation.  Keep in mind that the UK Modern Slavery Act is much more comprehensive than the California Act and expects transparency throughout the supply chain (not merely with direct suppliers).  And, it covers products and services.  Your supply chain transparency requirements may now be much broader.

EU Conflict Minerals Regulation Not Expected Until Mid-2016 – At the Earliest

We have been watching the EU process for some time, eager to determine when the EU conflict minerals regulation will finally be adopted. A source familiar with the EU Council proceedings has told us about the Council’s next steps, which will determine when the final consensus of the regulation can be expected.

The Council of the EU is currently developing its position on the conflict minerals regulation as proposed by the European Parliament on May 20, 2015. The Council working group met in September to discuss their preliminary views on the proposed regulation. During the September meeting, the European Commission presented its assessment of the draft regulation to the group. The presidency of the Council (which rotates between EU member states every 6 months) is held by Luxembourg until December 2015. We have learned that the Council aims to reach a position on the draft regulation during the Luxembourgish presidency (or by the end of 2015). Once this position is reached, trialogue negotiations with the Parliament and the Commission will begin. The result of those trialogue discussions would be a final consensus on the conflict minerals regulation.

Therefore, the timeline for the draft regulation will extend into 2016. The trialogue negotiations (among the EU Parliament, the Commission, and the Council) are not likely to begin until early 2016.

Event – Breakfast Briefing: Conflict Minerals 2.0 – The Second Wave of Compliance

Note: The following event is to take place on November 3, 2015 at 8:30 A.M. EDT at Squire Patton Boggs (US) LLP, 4900 Key Tower, 127 Public Square, Cleveland, OH 44114 and will not be broadcasted via webinar (i.e., this event must be attended in-person).


Companies have been living with the SEC’s conflict minerals rule since August 2012. What is in store for 2015 and beyond? What new developments and risks should companies be aware of?

Join Dynda Thomas and Sarah Rathke, partners at Squire Patton Boggs, and Douglas Hileman, President of Douglas Hileman Consulting, for an in-person briefing to find out.

We are pleased to have Doug Hileman join us for this Breakfast Briefing. His firm conducted an IPSA in each of the first two years of the Rule, and was one of only three US-based firms to do so for the 2014 reporting period.

The briefing will provide updates and insights on issues many companies are confronting for this reporting period – and as they plan their conflict minerals program for 2016. This briefing will focus on what reporting companies and their suppliers need to know about the following:

  • What is the impact of the recent Court of Appeals decision on the legal challenge?
  • How does this align with other SEC Guidance, industry standards, or enforceable requirements?
  • How are the conflict minerals filings being analyzed and ranked, by whom – and does this matter?
  • Will these studies influence how companies prepare their SEC filings for 2015?
  • How else can the NGO scoring reports be used to enhance conflict minerals programs?
  • Are companies required to provide an independent private sector audit (IPSA) with their calendar year 2015 report?
  • Why are some companies choosing to provide an IPSA?
  • What should be considered in an IPSA procurement?
  • How can you reduce the costs of an IPSA?
  • Can an IPSA actually help reduce other costs of your conflict minerals program?
  • What is the status of the proposed European regulation and what steps need to be taken to prepare for it?
  • Besides the requirements of the SEC Rule, what other risks can arise from conflict minerals?
  • What can be done to reduce these risks?

There will be ample time for questions and answers with the professionals, and for discussion with other affected companies.

To register for the breakfast briefing event, please click here.