by Cydney Posner
Yesterday, Acting SEC Chair Michael Piwowar issued two statements — available here and here — on the conflict minerals rules, neither of which is definitive, but which together make clear that further guidance on the rules is in the offing and that it may well involve some type of relaxation of the requirements, if not relief from the application of the rules altogether. What’s much less clear is whether any of that guidance will be timely for or even applicable to filings regarding the 2016 reporting period that are due on May 31, 2017. With companies in limbo as a result, the hope is that some clarification will be forthcoming.
You’ll recall that, in a 2014 court decision on a challenge to the rule (National Association of Manufacturers v. SEC), the D.C. Circuit upheld most aspects of the rule. (See this PubCo post.) However, it concluded that the rule violated the First Amendment to the extent that companies were required to report that any of their products have “not been found to be DRC conflict free.” As a result, the rule was largely upheld, but struck down in part, and the case was remanded to the district court for further proceedings consistent with the opinion. Following that decision, in an April 2014 statement by the Director of Corp Fin, former Corp Fin Director Keith Higgins fashioned a modified rule that required companies to make the mandated filing on a timely basis without including a statement as to the conflict-free status of the products that could be deemed to violate the First Amendment. In addition, in most cases, the requirement for an independent private sector audit was postponed. (See this PubCo post.) That was followed by the SEC’s partial stay of those portions of the rule that the D.C. Circuit had ruled unconstitutional as a violation of the First Amendment. (See this PubCo post.) After a lengthy history in the courts, former Attorney General Loretta Lynch decided against petitioning for cert., and the case was remanded back to the district court, where it remains. (See this PubCo post.) In the meantime, the 2014 statement by the Director of Corp Fin has continued to be operative. (See this PubCo post.)
In his statement yesterday, the acting Chair advised that, in light of the duration of the litigation, the expiration of the temporary transition period provided for in the rule, and the fact that “the reporting period beginning January 1, 2017, is the first reporting period for which no issuer falls within the terms of that transition period,” he had directed “the staff to consider whether the 2014 guidance is still appropriate and whether any additional relief is appropriate in the interim.” In that regard, he welcomed the submission of public comments during the next 45 days. His additional statement is, however, particularly telling:
“[The SEC’s] partial stay has done little to stem the tide of unintended consequences washing over the Democratic Republic of the Congo and surrounding areas.
While visiting Africa last year, I heard first-hand from the people affected by this misguided rule. 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. Given these facts on the ground, I believe that it is essential to hear from interested persons on all aspects of the rule and guidance.”
SideBar: From the get-go, opinion has been sharply divided about advisability of the conflict minerals rules. Early on, a series of high profile op-eds fed the controversy, igniting debate over whether the rules would actually mitigate the violence ravaging the DRC or, despite all laudable intentions, further devastate the war-torn region by inadvertently creating a de facto boycott of minerals from the area. (See this Cooley Alert.) That controversy has continued unabated. For example, in 2014, The Enough Project — one of the key proponents of the conflict minerals rule — issued a relatively favorable report on progress in the DRC and adjoining countries in curtailing the funding of armed groups through the trade in conflict minerals (tin, tantalum, tungsten and gold — 3TG). Happily, according to The Enough Project, much of the progress was attributable to “market changes spurred by the 2010 Dodd-Frank law on conflict minerals.” (See this PubCo post.) At the same time, an article published in The Guardian reported on an open letter “signed by 70 academics, politicians and civil society professionals [that] warns that efforts to block armed groups from selling minerals ‘risk contributing to, rather than alleviating, the very conflicts [such measures] set out to address.’” In contrast to the conclusions drawn by The Enough Project, the authors of the open letter argued that “the conflict minerals movement has yet to lead to meaningful improvement on the ground, and has had a number of unintended and damaging consequences,” including driving many miners to the “margins of illegality” through activities such as smuggling, or into insecure subsistence farming and extreme poverty, or, in a particularly perverse consequence, into joining militias to earn cash. (See this PubCo post.)
More recently, as discussed in this 2016 Bloomberg article, a report by a UN group of experts to the UN Security Council indicated that “[i]nternational regulations aimed at curbing the trade in so-called conflict minerals have failed to stop rebel groups and elements of the army in eastern Democratic Republic of Congo profiting from gold mining in the region… The lack of a functioning traceability system for gold is a ‘particular area of concern,’ the panel, which monitor sanctions on the Congo, said in [the report.] ‘Gold from non-validated mining sites, and therefore possibly benefiting armed groups, is laundered into the legitimate supply chain and, subsequently, into the international market,’ it said.” Apparently, soldiers from rebel armies enforce taxes on dredge owners and on miners entering the mines and bringing out ore. The programs developed for the three Ts — tin, tantalum and tungsten — have been more effective, having “reduced opportunities for armed groups, of which at least 60 continue to operate in eastern Congo, to profit from trade in the minerals. No comparable program has been introduced for gold, which is more transportable and more valuable, leading to an increase in illegal gold mining.” As reported, UN experts found that due diligence requirements to source gold from validated mining sites were being ignored, as metal sourced from multiple sites, some of which had not been validated as conflict-free, was aggregated together with conflict-free gold. In addition, under-declaring exports was “‘enabling the laundering of illegitimate gold that is not conflict-free into the international supply chain,’ according to the report.” In 2015, gold exports were “under-declared by at least $174 million.” (See this PubCo post.)
While it’s not hard to infer from the Acting Chair’s statements what his views are on the wisdom of the conflict minerals rules, the potential implications of his statements for 2017 reporting are more hazy. With the 2017 filing deadline imminent and the comment period open for at least 45 days, after which staff review and analysis would likely be required, it’s difficult to see how the new guidance would be timely for filings due in 2017— which, after all, require a lot of preparation well in advance of drafting. In addition, the statement refers expressly to the “reporting period beginning January 1, 2017,” although that reference may not be dispositive or even instructive. Nevertheless, it’s conceivable that some type of interim “additional relief” might be issued on a timely basis. Presumably, some clarification — at least of the informal variety — will be forthcoming, so stay tuned.
