Conflict Minerals Report No Longer Required? Wait — Not So Fast

Those hoping for updated SEC guidance that would relieve or reduce companies’ conflict minerals diligence and disclosure obligations for calendar year 2016 got only a fraction of what they wanted. Last Friday, April 7, 2017, the SECs Acting Chair Michael Piwowar issued a statement that said “it is difficult to conceive of a circumstance that would counsel in favor of enforcing” the requirements that companies file a Conflict Minerals Report or (if required) provide an independent private sector audit (IPSA) relating to its due diligence.

On the same day, the SEC Division of Corporation Finance issued a statement that it would not recommend enforcement if a company files only a Form SD describing its reasonable country of origin inquiry and whether any of its conflict minerals originate (or may originate) from a covered country.  The SEC Staff went on to warn that its statement was subject to further action by the Commission, was related to enforcement action only, and was not a statement of a legal conclusion. This statement is very different from the April 2014 SEC Statement, which provided affirmative guidance and told companies what they should do and what the SEC expected to see in the filings.

Importantly, the statements by the Acting Chair and the SEC Staff did not alter companies’ obligations to determine whether they are subject to the conflict minerals rule, to undertake a reasonable country of origin inquiry, or to file the Form SD.  And, the statements did not change the important existing guidance that a reporting company does not have to obtain an IPSA as long as it does not claim that any product is “DRC conflict-free.”

Threats to the Conflict Minerals Rule

It’s true that in his January 31, 2017 statement, Acting Chair Piwowar directed the SEC Staff to consider whether the guidance included in the April 2014 SEC Statement “is still appropriate and whether any additional relief is appropriate.” He also sought (and then received) public comment on all aspects of the conflict minerals rule and the existing guidance. It’s true that in early February, there were hints (via a leaked draft executive memorandum) that the Trump Administration would take action to suspend the conflict minerals rule for up to two years.  It’s true that the legal challenge to the conflict minerals rule is now concluded, and the SEC needs to reconsider the rule in light of the Court of Appeals’ First Amendment ruling.  It’s true that some of the April 5, 2017 testimony before the US Senate Committee on Foreign Relations, Subcommittee on Africa and Global Health Policy questioned the effectiveness of the rule and the private sector’s 3TG responsible sourcing efforts. It’s true that the GAO’s April 5, 2017 Statement indicated that the US Department of Commerce still has not completed several required actions in support of the conflict minerals rule.

Responses to Threats

But, since early February 2017, we have seen no further action on the leaked draft executive memorandum. In late March, a group of US Senators submitted a letter to the Inspector General of the SEC asking him to conduct an investigation into Acting Chair Piwowar’s actions and statements on the conflict minerals rule, claiming that he exceeded his authority in issuing them.  It is possible that members of Congress or Senators will question these recent statements as well.  NGOs and activists continue to advocate for the continuation of the rule, citing improvements in responsible sourcing of tin, tantalum and tungsten and the importance of private sector activity to break the link between armed groups and sourcing of minerals.

Limited Impact of the Statements

Last week’s statements did not provide clear relief from reporting companies’ obligations. They merely indicated that the SEC Staff would not recommend enforcement action against companies that fail to include a Conflict Minerals Report and, if required, an IPSA as exhibits to their Form SDs. If a company decides not to file a Conflict Minerals Report, that decision will not reduce much of its current compliance burden. For most companies, the supplier outreach and analysis, risks assessment and mitigation steps relating to calendar year 2016 have already been completed.  And, even if the rule is ultimately suspended or repealed entirely, companies may want to have one last opportunity to describe their conflict minerals diligence and risk mitigation efforts in a Form SD filing. Many companies (especially in certain industries) will likely continue to post some form of an annual Conflict Minerals Report on their websites if the conflict minerals rule is repealed.

Proceed With Caution

Although the Form SD is an SEC filing, the Commission is not the most important audience for the conflict minerals disclosure. NGOs, activists, socially responsible investors and consumers will continue to expect and then read the conflict minerals disclosure regardless of any SEC enforcement decision.  Those stakeholders may publicly criticize companies that rely on the SEC Staff’s statement as a justification for not filing a Conflict Minerals Report.  So, last week’s statements by the Acting Chair and the SEC Staff could be marked “Proceed With Caution.”

Final EU Conflict Minerals Regulation – Only the Publication Step Remains

Today, April 3, 2017, the European Council took the last procedural step and approved the EU conflict minerals regulation. Publication in the Official Journal of the European Union will be the next and final step of the process. The publication could occur in 3 to 6 weeks.  Here is the text of the official EU Conflict Minerals Regulation.

As discussed in our blog post of March 20, 2017, the EU regulation applies to importers into the EU of at least 95% of all minerals or metals containing or consisting of tin, tantalum, tungsten or gold. The regulation requires those importers to perform due diligence in an effort to promote responsible sourcing of those minerals and metals to ensure that their supply chains do not contribute to funding of armed conflict. The due diligence requirements will become effective starting on January 1, 2021, but importers are encouraged to apply the due diligence procedures as soon as possible. There will be negative financial and reputational consequences of having relationships with smelters and refiners that do not comply with approved third-party audit process requirements.  So, importers would be wise to get an early start and commence their efforts actively to manage their supply chains in advance of the January 2021 effective date.

According to the EU regulation, covered companies will be required to use the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas (or other guidelines that may be approved in the future) as the framework for their supply chain due diligence procedures.

One of the key areas for action yet to come is a non-binding handbook to be prepared by the Commission to help companies determine what constitutes a “conflict-affected and high-risk area.”  The content of this handbook could be surprising to many because “conflict-affected and high-risk areas” will likely include many parts of the world from which importers source their minerals and metals.  Further, having significant commercial relationships in such regions could subject even non-importers to questions about their sourcing and operations.

European Conflict Minerals Regulation — Details On What EU Importers Must Do

The proposed EU conflict minerals regulation has almost reached the last step before becoming an official EU regulation. On March 16, 2017, the European Parliament voted to approve the regulation, and the Council of the EU is expected to formally approve it in the weeks to come.  The Council’s vote will be the last step before the regulation is published and goes into effect.  The proposed regulation includes many of the same basic provisions as the US rule, but several reporting obligations and the coverage of the regulation are broader than those of the US rule.

Some are disappointed with the final EU regulation, saying that it is not strong enough.  But, those EU importers that are covered by it will certainly bear a significant burden to comply with its requirements.

Recent Timeline

Many individuals and organizations have been eager to see a European regulation to pair with the US conflict minerals rule.  But, the European negotiating process has been long and complicated, with very different points of view on what the nature and scope of the regulation should be.

The European Commission issued the first proposed regulation in 2014.  The Council of the EU and European Parliament each considered the regulation and proposed their own versions.  Then, the trilogue negotiations were undertaken to achieve a regulation text that would be acceptable to all three institutions.  In June 2016, there was an important breakthrough agreement on certain contentious elements of the legislation.  Then, on November 22, 2016, the trilogue negotiations were successfully concluded.

The Council of the EU approved the legislative text in December of 2016.  On January 24, 2017, the European Parliament’s International Trade Committee approved the text. Then, on March 16, 2017, the European Parliament overwhelmingly approved the legislation by a vote of 558 – 17 (with 45 abstentions).

After the regulation is formally approved by the Council of the EU, it will be published in the Official Journal of the EU.  It will enter into force 20 days after its publication, and take effect one month after the entry into force. However, the compliance and reporting provisions of the regulation will apply starting on January 1, 2021.  The EU regulation will be directly applicable to EU Member States without further action or procedure.

Key Provisions

Who Is Covered?

The new EU conflict minerals regulation applies to all importers into the EU of minerals or metals containing or consisting of tin, tantalum, tungsten, or gold.   An importer is defined by reference to the EU Customs Code and includes any metals or minerals that are declared for free circulation in the EU.  The regulation does not apply to importers whose annual import volumes are below a certain threshold amount.  This exemption is intended to provide some relief to smaller enterprises.  The volume thresholds are set so that at least 95% of the total imported volumes into the EU of each metal and mineral will be subject to the regulation.   The European Commission indicated, however, that it would closely monitor the gold market and EU gold imports to make sure that progress on responsible sourcing is not impeded by these low volume exemptions.

What Metals And Minerals Are Covered?

The regulation covers the following minerals and metals (and products containing them):

  • Tin ores and concentrates
  • Tungsten ores and concentrates
  • Gold ores and concentrates
  • Tungsten oxides and hydroxides
  • Tungsten carbides
  • Tantalum carbides
  • Gold, unwrought or in semi-manufactured forms, or in powder form
  • Tin, unwrought
  • Tin bars, rods, profiles and wires
  • Tin, other articles
  • Tungsten, powder
  • Tungsten, unwrought, includes bars and rods obtained simply by sintering
  • Tungsten wire
  • Tungsten bars and rods, other than those obtained simply by sintering, profiles, plates, sheets, strip and foil, and other
  • Tantalum, unwrought including bars and rods, obtained simply by sintering; powders
  • Tantalum bars and rods, other than those obtained simply by sintering, profiles, wire, plates, sheets, strip and foil, and other

Like the US rule, recycled metals are not covered by the EU regulation.

What Must The EU Importers Do?

The EU regulation includes many specific due diligence and disclosure obligations.  Any importer of the metals or minerals into the EU must undertake the supply chain due diligence steps that are set out in the regulation.  The due diligence steps must be consistent with the OECD Guidance or another diligence scheme that may be approved by the Commission.  The covered entities are also required to communicate their policies to suppliers and the public.  Their policies must state the standard that the entity used to develop its due diligence, they must assure that senior staff is responsible for overseeing the due diligence process, they must incorporate their policies into their contracts and agreements, and they must have a grievance mechanism for reporting concerns about the diligence process.  They are obligated to gather information about the source and chain of custody of the metals and minerals, including even more detailed information for those sourced from conflict-affected and high-risk areas.

They are also required to provide third-party audit reports on smelter and refiner diligence practices. They must identify and assess the risks of adverse human rights impacts in their supply chains.   Importers that pursue risk mitigation efforts as they continue to trade with, or even if they temporarily suspend trade with, certain suppliers are required to consult with suppliers, government authorities, civil society organizations, and other third parties on a risk mitigation strategy.  This is a burdensome additional step, and such consultation is likely to take significant time and resources.  Enterprises will make significant efforts to actively manage their supply chains and use only compliant smelters and refiners so that such consultation is not required.

Because of the focus on smelters and refiners, the importers are required to carry out audits by an independent third-party.  Those third-party audits will review the importers’ activities and systems to determine if they comply with the requirements of the regulation and to provide recommendations for improvement.    Importantly, the importers will not be required to carry out the third-party audit if they can show that all the smelters and refiners in their supply chains are recognized as “responsible” smelters and refiners by Commission.  This is another requirement that will motivate importers to get their supply chains in order before the obligations of the regulation take effect.

Finally, the importers must make annual public disclosures about their supply chain due diligence policies and procedures relating to responsible sourcing.

What Geographies Are Covered?

The EU regulation focuses on conflict minerals from all “conflict-affected and high-risk areas” around the world.   In this way, the EU regulation is different from the US rule, which focuses on conflict minerals only from the Democratic Republic of the Congo and adjoining countries.

What Due Diligence Framework Applies?

As is true for the US rule, the due diligence review is required to be undertaken in accordance with the due diligence guidelines of the Organisation of Economic Co-operation and Development (OECD).  The OECD Due Diligence Guidance on Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas is the same framework that has been used by nearly all of the companies that have filed conflict minerals reports with the Securities and Exchange Commission as required by the US rule.  The final EU regulation leaves it to the European Commission to establish the specifics of the supply chain due diligence schemes that will apply to enterprises so other frameworks could be accepted by the Commission.

When Does The Regulation Take Effect?

Technically, the EU regulation enters into force shortly after it is published.  But, the real compliance and reporting obligations on companies do not take effect until January 1, 2021.

What Is Still Not Settled?

The EU regulation calls for the European Commission to adopt several important “Delegated Acts,” which will create specific implementing provisions in connection with the regulation.  By these Delegated Acts, the Commission will amend the thresholds for certain concentrates and for certain tin-related and tantalum-related substances.  The Commission will also adopt Delegated Acts to set out the methodology and criteria to determine whether other due diligence schemes comply with the regulation. The Commission is to consult with the OECD to develop the requirements.  And, the Conflict-Free Sourcing Initiative (CFSI) has indicated that it is already doing a pilot assessment to determine how industry’s standards, systems, and implementation align with the OECD Guidance.  The CFSI’s conflict minerals reporting template (CMRT) has become the due diligence information gathering tool of choice for all industries, and importers covered by the EU regulation will likely use that tool as well.

What Additional Materials And Guidelines Will Be Provided?

To assist companies with their compliance efforts, the European Commission is required to publish a list of responsible smelters and refiners, and tell which of those smelters and refiners source any of their metals or minerals from conflict-affected and high-risk areas.   The Commission is required to prepare a non-binding handbook explaining how to identify what is a “conflict-affected and high-risk area.”  And, it will provide a regularly updated (but non-exhaustive) list of conflict-affected and high-risk areas.

What Should EU Importers Do First?

Although the effective date of the compliance requirements is several years out, importers that will be covered by the regulation would be wise to take some action soon to start preparing and put themselves in the best position to comply with the requirements of the regulation.  It will take many months to gather information about their supply chains and, if they wish to do so, assure that they only deal with responsible smelters and refiners before the regulation takes effect.  To get started, they could include these among their initial steps:

  • Name internal conflict minerals team
  • Develop conflict minerals policy
  • Map supply chains and gather product recipes and materials content data
  • Develop supplier engagement information
  • Watch for the Delegated Acts to be adopted by the European Commission
  • Review the outcome of the CFSI’s OECD Alignment Assessment (results expected in 2018)
  • Watch for developments to limit, weaken, or suspend the US conflict minerals rule


Conflict Minerals Rule Legal Challenge — Done and Done

“Hear ye, Hear ye.”  The parties to the legal challenge of the SECs conflict minerals rule have agreed that no further court proceedings are necessary and have requested that the US District Court enter a judgment in accordance with the decisions of the Court of Appeals — that is, that certain elements of the rule violated reporting entities’ First Amendment rights.   So, the legal challenge of the rule is over  — all but the final judgment to be entered by the US District Court.  A proposed final judgment is to be proposed by the parties no later than March 20, 2017.

It all started back on August 22, 2012, when the SEC adopted its conflict minerals rule as required by Section 1502 of the Dodd-Frank Act.  Two months later, on October 22, 2012,  a petition for review was first filed with the US Court of Appeals, District of Columbia Circuit, requesting that the conflict minerals rule be modified or set aside in whole or in part.  After many proceedings in the District Court and the Court of Appeals, in April 2014, the DC Circuit Court of Appeals held that Section 1502 and the conflict minerals rule violated the First Amendment “to the extent the statute and the rule require regulated entities to report to the Commission and to state on their website that any of their products ‘have not been found to be “DRC conflict free.'”  In April 2015, after a panel rehearing, the Court of Appeals issued a new opinion and confirmed its April 2014 ruling.

The case was remanded back to the US District Court for “further proceedings consistent with the Court of Appeals’ rulings.”   But, considering the previous statements of the SECs now-Acting Chair, Michael Piwowar, and the leaked draft Executive Order relating to the conflict minerals rule, it is no surprise that the SEC agreed that no further proceedings were necessary.

Now, we wait for the other shoe(s) to drop —

  1. On January 31, 2017, Acting Chair Piwowar encouraged interested parties to submit comments to the conflict minerals rule and the existing SEC guidance relating to it.  Comments in support and in opposition to the rule, and comments requesting more relief from the requirements of the rule are being taken until March 17, 2017.  It is likely that the conflict minerals obligations on reporting companies will be reduced and not increased in any resulting guidance from the SEC.
  2. President Trump could issue an Executive Order that would waive compliance with the rule for 2 years (as was contemplated in the draft memo leaked in early February 2017).
  3. Congress could adopt legislation that would repeal Section 1502 of the Dodd-Frank Act and the resulting conflict minerals rule.

But, considering the repeated legal challenges to President Trump’s Executive Orders and the complexity of the legislative process, the path of least resistance for the Administration seems to be new guidance from the SEC.

Reporting companies will be watching closely to see if any such new guidance comes in time to impact their preparations for the Form SD filings due May 31, 2017.

Executive Order on Conflict Minerals? Not Yet

You may have read that President Trump signed an executive order repealing or waiving the SEC conflict minerals rule.  Not true — at least not yet.  As of February 14th, no executive order relating to the conflict minerals rule had been signed.  But, a leaked draft of an executive order and rumors about a plan to waive the conflict minerals rule seem to be enough for people to talk as if it has already occurred.   Check out the link below for some thoughts about what might follow an executive order and what to do in the meantime.  We also walk through what Section 1502 of the Dodd-Frank Act actually says about revisions or waivers to the rule and give a status update on the legal challenge of the rule.  Executive Order on Conflict Minerals? Not Yet

Piwowar’s Statement on SECs Conflict Minerals Rule – We Could Have Seen It Coming

In a move that has already been widely reported, on January 31, 2017, the SEC’s Acting Chairman Michael Piwowar issued a statement on the SECs conflict minerals rule, in which he directed the SEC staff to “consider whether the [April] 2014 guidance is still appropriate and whether any additional relief is appropriate in the interim.”  Interestingly, he called for comments only about whether additional relief from requirements should be given, and not about whether any elements of the rule should be strengthened.  He called for a 45 day comment period.

Along with that statement, he issued another statement providing some insight  into this new reconsideration of the rule.  This insight focused mostly on the “unintended consequences” of the rule on the human rights of the people of the Democratic Republic of Congo (DRC or Congo) and adjoining countries.  He stated:

The disclosure requirements have caused a de facto boycott of minerals from portions of Africa, with effects far beyond the Congo-adjacent region. Legitimate mining operators are facing such onerous costs to comply with the rule that they are being put out of business. It is also unclear that the rule has in fact resulted in any reduction in the power and control of armed gangs or eased the human suffering of many innocent men, women, and children in the Congo and surrounding areas. Moreover, the withdrawal from the region may undermine U.S. national security interests by creating a vacuum filled by those with less benign interests.

Certainly, some NGO’s, activists, and people on the ground in the DRC have provided evidence that human rights conditions at some mines in the DRC have improved since the SEC conflict minerals rule was implemented.  But, others point to evidence supporting the opposite conclusion.  So, we can be sure that many comments will be submitted on both sides of that issue.

We will likely also see comments on the following:  when should an independent private sector audit be required, should cobalt be added to the list of minerals covered by the rule, will formal confirmation be provided that chemically distinct compounds are not within the scope of the rule, and should the specific disclosure requirements for reporting companies be adjusted in light of the overall results of the due diligence efforts over the last 3 years.

The observation about the undermining of US national security interests is significant.  Section 1502 of the Dodd-Frank Act, which required the SEC to issue the conflict minerals rule, includes a provision that permits the SEC to revise or waive the requirements of Section 1502 or the conflict minerals rule for two years if the President determines that the revision or waiver is in the national security interest of the US.   So, by raising that national security concern, Acting Chairman Piwowar is telegraphing that it could be another justification for repealing or waiting (at least temporarily) the SECs conflict minerals rule.

Why should we not be surprised?

First, the legislative context.  In 2016, Republican law makers introduced 2 bills in the U.S. House of Representatives that would repeal (or defund enforcement of) the SECs conflict minerals rule.  And, another Dodd-Frank generated rule — the one relating to resource extraction payment disclosure, which would also have been reported on Form SD — is being reviewed and could be overturned under the Congressional Review Act (CRA).  (The conflict minerals rule is not subject to being overturned via the CRA because the CRA can only be used by this new Congress to overturn final rules that were issued after early June 2016.)

Second, the Presidential context.  Of course, the Trump Administration has pledged to review and overturn or repeal regulations it sees as overly burdensome.  And, on January 26, 2017, President Trump named Commissioner Michael Piwowar as Acting SEC Chairman to serve until President Trump’s SEC Chairman nominee is confirmed by the Senate.

Third, the previous positions taken by Acting Commissioner Piwowar.  On April 28, 2014, then Commissioner Piwowar (appointed by President Obama) and former Commissioner Daniel Gallagher, issued a statement on the SECs conflict minerals rule, which included the following:

Unfortunately, the evidence is that [the conflict minerals rule] has been profoundly counterproductive, resulting in a de facto embargo on Congolese tin, tantalum, tungsten, and gold, thereby impoverishing approximately a million legitimate miners who cannot sell their products up the supply chain to U.S. companies. Reconsidering Section 1502’s core approach would also save investors billions of dollars in compliance costs, and ease the problem of information overload by eliminating special interest disclosures that are immaterial to investment decisions.

That discussion is a clear preview of the concerns expressed by Acting Chairman Piwowar in yesterday’s statements.

Although not mentioned in either of the January 31, 2017 statements, it is worth noting the concern Acting Chairman Piwowar expressed about “special interest disclosures that are immaterial to investment decisions.”  This view of social issue disclosure was shared by former SEC Chair Mary Jo White.  It will be interesting to hear what SEC Chairman nominee, Jay Clayton’s, views are about these (non-climate change) “special interest disclosures.”  Either way, this concern too could be a justification for repealing or significantly paring back the requirements of the SECs conflict minerals rule.

So, between now and the middle of March, supporters, detractors and reporting companies with questions and proposals will have their opportunity to weigh in on the SECs conflict minerals rule — as modified by the April 2014 SEC Statement.  And those questions and proposals will be informed by 3 years of experience with the rule.

EU Conflict Minerals Regulation – Where do things stand?

Almost two months after the negotiations of the EU conflict minerals regulation were concluded, there has been some movement towards the end of the European legislative cycle. On January 24, 2017, the European Parliament’s International Trade Committee approved the text of the conflict minerals regulation submitted following the three-way trilogue negotiations that were completed on November 22, 2016. Now, the International Trade Committee is expected to refer the legislation to the European Parliament’s plenary for a formal adoption. That formal adoption is likely to occur at the mid-February plenary session.

The European Council approved the legislative text, as agreed in the trilogue negotiations, in December 2016. After both the European Parliament and Council have formally approved the legislative text, the file will be sent for publication at the Official Journal of the EU and will enter into force 20 days after its publication.

Conflict Minerals in 2017 – What’s New?

It’s January 2017, and some believe it will be the last year for the SECs conflict minerals rule.

Political and Legislative Environment

President Trump’s inclination to roll back regulation reduces or even eliminates the likelihood of a Presidential veto of any Congressional action to repeal Section 1502 of the Dodd-Frank Act and the SECs conflict minerals rule.

In 2016, the U. S. House of Representatives passed H.R.5485, the Financial Services and General Government Appropriations Act (for fiscal year 2017), which included a provision to defund the implementation or enforcement of the SECs conflict minerals rule.  Defunding the enforcement of the conflict minerals rule would be largely a symbolic gesture because the SEC has taken few public steps to administer the rule since 2015 and hasn’t pursued any enforcement action regarding it.  In early 2016, it decided not to seek Supreme Court review of the Second Circuit decision that found elements of the rule to be unconstitutional.

Also in 2016, the “Financial CHOICE Act”  was introduced  in the U.S. House of Representatives.  If passed, it would (among other things) repeal Section 1502 (conflict minerals) of the Dodd-Frank Act.

But, even if one of these bills becomes law, it would not “un-ring” the conflict minerals bell.

Attention to Responsible 3TG Sourcing Likely to Continue

For most companies covered by the rule, their conflict minerals due diligence programs are up and running and have been incorporated into their day-to-day operations. If the conflict minerals rule were repealed, of course, companies would no longer file Form SDs.  But many (depending on industry) would continue to perform due diligence on their 3TG in response to customer demands.  This due diligence — as outlined by the OECD Guidance — includes supplier engagement, management systems, and addressing supply chain risks.  Some companies would continue to publish reports of some kind, posting them on their websites or including them as part of other corporate social responsibility disclosure. Even if the SECs conflict minerals rule were repealed, commercial pressure requiring companies to know and control the origin and chain of custody of their raw materials and products is likely to continue – and even grow.  That commercial pressure could expand to include other minerals in addition to 3TG.

In addition, the EUs conflict minerals regulation will soon start to impact European importers and will focus on all “conflict-affected and high-risk areas” throughout the globe, not just the Democratic Republic of Congo and adjoining countries.  The voices of NGOs and activists are more numerous and their influence has grown significantly over the last few years.  Market leaders in the electronics and automotive industries have made significant progress toward supply chain transparency with respect to the 3TG in their products.  Consumers (especially millenials) will continue to expect responsible sourcing.

It is possible that eliminating the SECs conflict minerals rule could motivate and energize NGOs, socially responsible investors, activists and other stakeholders further.  After any repeal, they would not be hemmed in by the specific provisions of an existing US rule.

But, even if repeal were to occur, we don’t know when it would become effective. So, don’t take your foot off the accelerator.  Instead:

  • continue to implement your conflict minerals due diligence program
  • be in communication with your customers
  • prepare your conflict minerals filing

Considerations For Calendar Year 2016 Reporting

As you work toward your calendar year 2016 reporting, keep the following considerations in mind:

  • The Form SD filing for calendar year 2016 could be the last conflict minerals report filed.  If it is, it would be your last opportunity, via the Form SD vehicle,  to tell your story about your due diligence and supply chain transparency efforts.
  • Pursuant to the guidance in the April 2014 SEC Statement, IPSAs are still not required unless you choose to make a claim in your conflict minerals report that a product is DRC conflict-free.  It is almost inconceivable that the SEC would take any action to change that guidance before the May 31, 2017 filing deadline.
  • If you confirm to a customer that you meet its requirements (to be DRC conflict-free or to disengage from all suspect smelters or refiners in your supply chains), you will need to be careful about what you say in your report or you could trigger the requirement for an IPSA.
  • Remember to demonstrate your efforts in all 5 areas of the framework expressed in the OECD Guidance.
  • Groups that prepare ratings and rankings expect companies’ actions and results to improve year on year.
  • Even if the SECs conflict minerals rule is repealed, it is likely that NGOs and activists will continue to view sourcing due diligence as “required.” They will continue to prepare reports, scores, and analysis of 3TG policies, procedures, and disclosure.
  • NGOs and activists have already signaled their belief that the specific actions called for by the OECD Guidance continue to develop over time.
  • You should continue to focus on the OECD Guidance as the source for and expression of those increasing expectations.

In short, work toward reaching conclusions about the source and chain of custody of the 3TG in your products and actively manage your supply chain with responsible sourcing of 3TG in mind.

The New EU Conflict Minerals Regulation — Is It Something To Be Thankful For?

Since the US Presidential Election 2 weeks ago, some have been looking forward to a possible repeal of the US conflict minerals rule by a newly-elected Trump Administration. But, the completion of the negotiations on the new EU conflict minerals regulation makes it clear that companies should not slow their due diligence efforts on the source and chain of custody of the tin, tantalum, tungsten and gold in their products.

The negotiations of the EU conflict minerals regulation concluded yesterday (November 22, 2016) through the so-called “trilogue negotiations.” This is another major step toward the final adoption of the legislation and the establishment of an EU legislative framework for conflict minerals.

How Did We Get Here? — After the European Parliament and Council agreed on their respective negotiating mandates, the trilogue negotiations started. The EU’s trilogue negotiations are held between the European Commission, European Parliament and Council. In June 2016, an important breakthrough occurred when these three institutions reached a political understanding on certain contentious elements of the conflict minerals legislation. At that point in the negotiations, the obligations on upstream companies in the conflict minerals supply chain were set.

Once this political understanding was reached, the negotiations continued on a more technical level. It is important to note that the Netherlands led the Council’s negotiations until June 2016 until Slovakia assumed the Council Presidency role in July 2016.

What Just Happened? — The negotiations among the three institutions continued for several months. Ultimately, on November 22, 2016 the trilogue negotiations were “successfully” concluded. Under the new regulation, starting on January 1, 2021, an estimated 95 percent plus of the minerals processed in smelters or refiners within the EU will be required to go through a due diligence process. Large manufacturers in the EU will be obliged to disclose their strategies for monitoring the sources of their minerals.

One of the controversial issues that was battled through until the end was whether the due diligence system would be mandatory or voluntary. The European Parliament finally won the battle with mandatory due diligence requirements for importers of conflict minerals from all conflict-affected and high-risk areas (not just central Africa) making it into the final text. The due diligence review will be required to be in accordance with the OECD guidelines. Then, authorities from the EU Member States themselves will be responsible for ensuring and enforcing compliance. They will determine any sanctions for non-compliance as well.

One important accommodation was made in the agreement that was reached. Smaller importers of minerals and metals (for example, jewelers and dentists) will not be obliged to comply with the mandatory due diligence requirements.   The European Commission will, however, closely monitor the gold market and EU gold imports in an attempt to assure that efforts on responsible sourcing are not defeated by these exemptions.

An additional term that is now part of the final text is a disclosure regime for large EU manufacturers and sellers. This provision will apply to large EU firms that are subject to the EU law on non-financial reporting for their purchases of tin, tantalum, tungsten and gold for use in their products. This term puts into place a voluntary reporting mechanism to encourage these companies to report on their sourcing practices by addressing certain performance indicators.  The reports would be made to an EU registry.

Finally, a review clause has been introduced into the regulation, whereby the European Commission will review and report to the European Parliament and Council on the effectiveness of the new regulation two years after the implementation date and every three years thereafter. More specifically, the European Commission’s effectiveness report will cover both the impact of the regulation on the ground in conflict-affected and high-risk areas as well as compliance by EU companies. The report will also propose possible additional measures if companies’ due diligence efforts are deemed to be insufficient.

What Happens Now? — While the trilogue negotiations have concluded, there are still a few procedural steps to take before the regulation becomes official EU legislation. The legislative text as agreed during the trilogue negotiations (in English) will be submitted to judicial linguists who will review the text for legal consistency and translate it into all EU official languages. Any resulting amendments would consist of only minor linguistic changes which would not alter the content of what was agreed upon in the trilogue negotiations. The judicial linguist process should take a few months. Once this process is finished, the text will be submitted for a final approval by the Council and the European Parliament. The exact timing of the final approval is not known yet, but it is likely to occur during the first quarter of 2017. The conflict minerals regulation will become official EU legislation once it is published at the Official Journal of the EU and will enter into force 20 days after its publication.

  • Dynda A. Thomas (US) and Christina Economides (Belgium)

UK Modern Slavery Act — Let The Posting Begin

Many organizations started voluntarily posting their modern slavery and human trafficking statements months ago. But now, the Modern Slavery Act’s transition period is over, and there are real deadlines to meet.  Covered companies with financial years ending 31 March 2016 must post statements as soon as reasonably practicable but within six months of their financial year end.  For those companies, their deadline for posting a statement was 30 September 2016.   Non-governmental organizations have already started reviewing, scoring and rating posted modern slavery statements.  So, in addition to focusing on the content of the statement, it is important to attend to the Modern Slavery Act’s technical requirements so that the statement is viewed as being compliant.

Here are a few technical requirements to keep in mind:

  • The statement should describe the steps taken by the company during the financial year covered by the statement.
  • The statement must be approved by the Board of Directors.  If the board of directors meets only quarterly, the statement needs to be prepared early enough to meet the Board’s meeting schedule.
  • The statement must be signed by a director. The person signing is intended to be a senior person in the business to assure accountability. So, it is best for the person signing to be a statutory director. Website content is not typically “signed,” so this is an unusual requirement and is sometimes missed.
  • Companies must include a link to the modern slavery statement in a prominent place on their website’s homepage. According to the Home Office Guidance, this means a link that is directly visible on the homepage or part of an obvious drop-down menu on that page. The Guidance recommends a link that uses words such as “Modern Slavery Act Transparency Statement” so that the contents of the link are clear. Website content is important for organizations, and it can be a challenge to meet these posting requirements.  At the very least, it takes time and coordination to implement a homepage link, so that additional time must be built into the compliance schedule.
  • Finally, a UK quoted company should consider how its Modern Slavery Act statement fits in with the Strategic Report and Directors’ Report required by the Companies Act 2006, which requires a report on human rights issues where necessary to understand the company’s business.