Costs of Conflict Minerals Compliance (1 of 3) – Why lower than expected?

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.

So, borrowing from late night TV, here are (in reverse order) 11 reasons why the out-of-pocket costs of compliance with the SEC conflict minerals rule have been lower than originally estimated:

11.  Scoring and benchmarking by only one group. The most significant and visible scoring and benchmarking of conflict minerals disclosure has been done by one group — initially the group was at Tulane University and now that group is known as Development International. Because the scoring and benchmarking is being published by one group, companies have been saved from navigating among various and inconsistent scoring methodologies and results.

10.  Minimal pressure by SEC. There has been minimal SEC follow-up with or comment to individual filers on their Form SDs and conflict minerals reports. There has been very little guidance from the SEC that has required additional investment in compliance programs or increases to disclosure. There has been no enforcement action against companies for failure to comply with SEC conflict minerals reporting obligations.

9.  OECD Guidance as a framework. The OECD Due Diligence Guidance is a framework for due diligence efforts and not a litany of absolute requirements. Precious few downstream companies have implemented all of the elements for each of the 5 steps exactly as stated in the Guidance. For example, the OECD Guidance suggests that downstream companies should visit the smelters and refiners in their supply chains and require them to source responsibly. Smelters and refiners cannot possibly accommodate visits by all companies that receive, directly and indirectly, conflict minerals that they process.  And companies cannot afford to incur the costs of auditing all the possible smelters and refiners in all their supply chains — and duplicate the efforts of others doing the same thing.  And, most companies have not done so – at least not directly.

8.  Uncertainty about future of rule. Many groups have been working to repeal the rule – through legal challenges and legislative action. For the first few years of the rule, industry engaged in a legal challenge to the rule and its requirements. In the early days of the Trump Administration, it appeared that President Trump might take action to waive compliance with the rule by relying on certain provisions of Section 1502 of the Dodd-Frank Act.  The proposed Financial CHOICE Act (which was passed by the US House of Representatives in May) would repeal Section 1502 in its entirety. The growing uncertainty during 2016 and 2017 about the rule’s future led most companies to “stay the course” during the last reporting period and not make significant programmatic changes in their compliance approach.

7.  Compounds not in scope. After a lot of effort by several industry associations, the SEC provided informal guidance that chemically-distinct compounds are not in the scope of the rule. This approach significantly reduced the number of products and the number of companies that are covered by the rule. For countless products in many industries, the only connection to conflict minerals was their use of compounds. So, the SEC guidance on this point reduced the overall cost of compliance.

6.  IPSAs not required. In April 2014, the SEC provided guidance that allowed companies, under certain circumstances, to avoid having to obtain independent private sector audits (IPSAs) on their due diligence efforts. The SEC provided this reprieve after the April 2014 Court of Appeals’ ruling that certain elements of the conflict minerals rule violated companies’ First Amendment rights.  The legal challenge that led to that decision was brought by the National Association of Manufacturers, the Business Roundtable and the Chamber of Commerce. The requirement for the IPSA is included in Section 1502 of the Dodd-Frank Act, so the SEC will have to address that requirement as it reconsiders the rule in light of the Court of Appeals’ ruling. But, not having to obtain IPSAs for the last 3 reporting years has resulted in significant cost savings for most companies.

5.  Limited number of smelters/refiners. There are roughly 400 smelters and refiners of conflict minerals world-wide.  Because of that limited number of processors, industry is able to focus directly on requiring them to comply with recognized due diligence standards for conflict minerals sourced from the Democratic Republic of Congo and adjoining countries. So, most companies have not undertaken extraordinary efforts to determine the particular smelters and refiners the processed the conflict minerals in their products.  Instead most have opted to identify all the possible smelters and refiners in all their supply chains.  Then, they seek to confirm that all those identified are compliant with recognized due diligence standards.  As a practical matter, focusing on those smelters and refiners can be more efficient than trying to obtain product-level information from all direct and indirect suppliers in a company’s supply chains.

4.  Success of CFSI audit program. The Conflict Free Sourcing Initiative is one of most important resources for companies’ compliance efforts. It provides independent, third-party audits of smelters’ and refiners’ sourcing practices and provides validated lists of smelters and refiners that have been found to have complied with Conflict-Free Smelter Program protocols. Companies across all industries and in all regions rely on CFSI’s audit program.

3.  Early standardization of disclosure forms. The rule does not provide specific reporting format requirements. But by their early collaborative efforts, industry associations, working groups, inhouse counsel online resources, and law firms developed standardized outlines and examples of Form SD disclosure and conflict minerals report disclosure.  The pre-effective date sharing of those outlines and examples, and their wide-spread dissemination, led to more uniformity in disclosures and lower drafting costs.

2.  Inhouse resources bear the compliance burden. Most of the conflict minerals compliance efforts have been undertaken by in-house personnel. And, very few companies created new positions to accomplish these efforts. So, while the out-of-pocket costs have been lower than expected, the burden of compliance on in-house resources should not be underestimated.   Over time, a growing number of companies have turned to software solutions for large portions of their supplier engagement efforts and their smelter and refiner analysis.  Fierce competition and price pressure on those software solutions have reduced the out-of-pocket costs of these tools.  Finally, in-house personnel are able to take advantage of vast amounts of high-quality, free online resources.

1. Conflict Free Sourcing Initiative’s Conflict Minerals Reporting Template (CMRT). The electronics industry (namely, members of the Electronic Industry Citizenship Coalition and the Global e-Sustainability Initiative) founded the Conflict-Free Sourcing Initiative, which went on to create an open source template for gathering information about source and chain of custody of conflict minerals.  That template was the tool of choice for most industries in the first year of the rule. By year two, the CMRT was almost uniformly used across all industries, all geographies, by companies large and small.  Again, this industry-lead effort was a huge success and contributed to significant overall out-of-pocket cost savings.

Are there factors and circumstances that have increased costs and burden of compliance notwithstanding that companies have just entered year 5 of compliance? Yes – see our next blog post (2 of 3) for a discussion of some of those factors.

And, there are changes that could reverse the trend, add requirements and increase out-of-pocket costs going forward? Yes — see blog post 3 of 3 for a discussion of those possible changes.


Financial CHOICE Act Passes in the House — Would Repeal SEC Conflict Minerals Rule

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.

EU Conflict Minerals Regulation — Finally Published in the Official Journal!

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.


Conflict Minerals Rule — Will It Stay or Will It Go?

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.

For those that have not yet filed, many completed most (or all) of their work for the calendar year 2016 filings by the time the April 2017 Statement was released and will be making the usual filings as the final step in the process. Some have indicated that their stakeholders want to see the descriptions of their due diligence measures.  And, if the rule is repealed, this would be the last conflict minerals report required by the SECs conflict minerals rule, and companies may be taking the opportunity to describe their conflict minerals diligence efforts one last time.

For future years, even if there is no specific US law requiring it, companies in a number of industries (including electronics, of course) will continue to ask their suppliers for completed CFSI conflict minerals reporting templates. And, some may continue to provide public disclosure about their supply chain transparency, responsible sourcing, and conflict minerals due diligence efforts and successes.

For years, the conflict minerals guidance from the SEC was unchanged.  But, since January of 2017, actions by the new Congress, the Trump Administration (including its appointees), and opposition to those actions have brought conflict minerals back into the headlines.  It remains unclear what changes to the rule might come from the SEC or from Congress or if it will be repealed entirely.  As companies are preparing this year’s filings, they can consider the current state of affairs:

  • Democratic Senators have objected (in writing) to the April 2017 Statement, arguing that the SEC staff (and then-Acting Chairman Piwowar) did not have the authority to take actions that would, in their words, repeal or modify the requirements of the rule. This letter came after an earlier letter asking the Inspector General of the SEC to investigate then-Acting Chairman Piwowar’s January 31, 2017 action to reconsider the conflict minerals rule, questioning whether that action was authorized or justified. Now that Jay Clayton has been sworn in as SEC Chairman, we will be watching for indications of his position on non-financial disclosures like those required by the conflict minerals rule.
  • NGOs have objected to any action to repeal or reduce obligations under the conflict minerals rule as well.  See the  comments of Amnesty International to SEC regarding re-assessment of conflict minerals rule.  So, we can be sure that NGOs (in particular, Development International, the leading reviewer and scorer of conflict minerals disclosure) will call out and publicize the names of companies that do not include the full complement of disclosures they are expecting.
  • The Financial CHOICE Act 2.0 was passed by the House Financial Services Committee on May 4, 2017.  The bill includes a repeal of Section 1502 of Dodd Frank, the section of Dodd Frank that required the SEC to issue the conflict minerals rule.  The bill is now headed to the full US House of Representatives for consideration.  If the repeal of Section 1502 becomes law, the SECs conflict minerals rule would be repealed as well.
  • But, even if the Financial CHOICE Act passes in the House, it will face fierce opposition in the US Senate.  An invigorated Senate minority will likely attempt to block the bill by filibuster (which would create a “super-majority requirement” for passage).  Because there seems to be near unanimous support for the conflict minerals rule by Democrats, it is possible that a deal could be proposed to keep Section 1502 in exchange for votes from Senate Democrats on the overall measure.
  • If Section 1502 does remain law, some action should be taken with respect to the text of Section 1502 to address the US Court of Appeals’ August 2015 ruling that a portion of the conflict minerals rule’s disclosure requirements (and possibly Section 1502’s disclosure requirements) violates companies’ First Amendment rights.
  • If Congress takes some action to address the impact of the First Amendment ruling, it should jump at the chance to re-work the independent private sector audit (IPSA) requirement.  Because the IPSA is not a “financial audit,” Section 1502 required the IPSAs to be conducted using the US Government Accountability Office Government Auditing Standards (commonly referred to as the “Yellow Book”).  But, Yellow Book does not fit the conflict minerals rule disclosure perfectly, and using it as the standard creates its own set of issues and difficulties. Because the guidance in the April 2014 SEC Statement has given filers a pass on IPSAs (under certain circumstances), these issues and difficulties have not yet fully played out and they certainly have not been addressed.  This issue has been discussed and commented on at length by Douglas Hileman of Douglas Hileman Consulting at Other provisions of Section 1502 (including those requiring actions by the State Department, Comptroller General and the Commerce Department) could also be reconsidered.

Stay the Course

Bottom line – although there is legislative action underway to repeal Section 1502, the SECs conflict minerals rule could remain in place, either as is or as amended.  So, companies would be wise to make their filings of their Form SDs as required by May 31, 2017 and then continue their due diligence efforts and procedures until there is updated guidance or final action on Section 1502 and the conflict minerals rule.  After that updated guidance or final action, companies will be able to determine what steps they will take for calendar year 2017, either with or without Section 1502 and the conflict minerals rule.

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.