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.
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.
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.
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.
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.
As we approach the end of conflict minerals compliance year 4 (with 3 years of reports behind us), companies are budgeting for how they will address conflict minerals in 2017. Since the SEC rule took effect, supply chain professionals and in-house lawyers have found that compliance is complicated, time-consuming, and still changing because of the increasing expectations of non-governmental organizations and other stakeholders. Companies are eager to find a compliance solution that will take less time and fewer resources. The “bad news” is that, although IT and software solutions can be an invaluable tool and provide great value, companies cannot expect to comply with the SEC rule’s requirements solely by entering into a relationship with a strong software provider.
To be sure, software and IT solutions can provide invaluable assistance to companies as they implement and improve their conflict minerals programs. But, there are many important elements of conflict minerals compliance and reporting that are simply not addressed even by the best IT or software systems. You will want to make sure that your board and senior management understand that signing the contract with a software provider is the start (and not the end) of your compliance work. They may need to understand that your budget contemplates additional resources to complete your annual reasonable country of origin inquiry, due diligence, and reporting. And, it would be wise to continue to include room in your budget for auditors and legal advisors. (We won’t discuss the independent private sector audit (IPSA) here, but there has been no change since last year and no additional guidance on IPSAs from the SEC.)
What Just Happened?
April 7, 2016 was the deadline for filing a petition for writ of certiorari to the US Supreme Court seeking a review of the court of appeals’ decision on the conflict minerals rule. The SEC did not file the petition, and Amnesty International (the intervenor in the case) did not make the filing either.
In her March 4, 2016 letter to House Speaker Paul Ryan explaining the government’s decision not to file the petition for a writ of certiorari, Attorney General Loretta Lynch walked through key elements of the court of appeals’ decision and offered a glimpse into the next procedural steps for the rule. First, she recited the court’s decision that the conflict minerals rule’s disclosure requirements:
violate the First Amendment to the extent [they] require regulated entities to report…that any of their products have “not been found to be ‘DRC conflict free.’”
If your organization has a financial year-end of March 31, 2016 and is covered by the UK Modern Slavery Act 2015 (MSA), yours is in the first wave of MSA statements (MSA Statements) that must be published. The MSA Statement will set out what steps your organization has taken during the financial year to ensure that slavery and human trafficking is not taking place in your supply chains or in your own operations. The first MSA Statements that are due will cover efforts undertaken between April 1, 2015 and March 31, 2016 (Year 1).
So, for the most part, steps taken after March 31 (less than 2 weeks from now) will not be relevant to your first MSA Statement. (Remember, for an organization with a financial year-end of April 30, 2016, your first MSA Statement will cover efforts undertaken between May 1, 2015 and April 30, 2016 and so on.) If your organization is in the first wave of MSA Statements that must be published, you do have a bit of time before you need to start drafting your MSA Statement. But, you should consider now whether there are any additional steps you can take before March 31, 2016, so that those steps can be included in your MSA Statement for Year 1. You are free to include a description of what you plan to do going forward. But, a description of plans is optional and what the MSA requires is information about efforts that were actually undertaken during Year 1.
The next and last step of the legal challenge of the SEC’s 2012 conflict minerals rule would be for the SEC to file a petition for writ of certiorari to the U. S. Supreme Court. The deadline for making that filing has been extended again, this time from March 9th to April 7th, 2016.