The out-of-pocket costs of compliance with the SEC conflict minerals rule have been lower than those originally estimated by industry and by the SEC. But, it’s not because the original estimates were over-stated or inflated. And, these lower than expected out-of-pocket costs don’t mean that business’ concerns about compliance were misplaced. These lower costs have resulted mostly (but not completely) from tools and approaches developed by industry.
Today, on June 8, 2017, the US House of Representatives passed the Financial CHOICE Act by a vote of 233 to 186. The bill was sponsored by House Financial Services Committee Chairman Jeb Hensarling (R-Texas). The headline of the bill is that it would reverse much of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Section 1502 of Dodd-Frank is the statutory authority for the SEC’s conflict minerals rule. Page 482 of the 589 page bill includes a provision that would simply and completely repeal Section 1502 (among several other disclosure and miscellaneous provisions). However, according to many observers, the bill is not expected to pass the Senate in its current form.
We will continue to watch as the bill progresses to the Senate for action there. Subscribe to our blog to get updates on the bill.
At long last, the EU Conflict Minerals Regulation was published today in the Official Journal of the European Union. The EU Conflict Minerals Regulation 2017 (as published) will enter into force 20 days after publication (June 8, 2017) and take effect 1 month after that (July 8, 2017).
The effective date is January 2021, but companies would be wise to start thinking about how the regulation will impact them. There are some significant consequences for importers that deal with non-compliant smelters or refiners — including required consultations and third-party audits. These consultations and audits will be time-consuming and expensive. So, importers will be motivated to manage their supply chains so that they can avoid these additional burdens. Those who have been working on conflict minerals compliance under the US rule know that it takes some time to examine and successfully manage the make-up of a company’s supply chains. So, don’t wait to examine this final regulation more closely.
With only 19 days left before the SECs Form SD filing deadline, there is still a lot of talk about consequences of the SECs April 7, 2017 Statement (“April 2017 Statement”). In that statement, the SEC staff indicated that it would not recommend enforcement action to the Commission if a company that is otherwise required to file a conflict minerals report as an exhibit to its Form SD does not file that conflict minerals report. Filers have been considering what the April 2017 Statement means for them and whether they will make any changes to their filings based on it.
In a small sampling, our quick review of the 31 calendar year 2016 Form SD filings made as of May 11, 2017 shows that 13 filed Form SDs only, 18 included conflict minerals reports as exhibits, and none appear to have omitted their conflict minerals reports based on the April 2017 Statement.
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.
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.
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.
“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.
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
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.