SEC Conflict Minerals Rule Faces New Scrutiny Ahead of May Filing Deadline

A flurry of activity on conflict minerals in recent weeks has added new uncertainty to the long-simmering debate over the future of U.S. conflict minerals reporting requirements. The U.S. Securities and Exchange Commission (SEC) announced plans to reconsider its 2012 rule implementing Section 1502 of the Dodd-Frank Act and requested public comments on all aspects of the rule. President Donald Trump is reportedly considering a Presidential memorandum that could waive the SEC conflict minerals rule for up to two years based on national security interests. In what may be a step toward considering new approaches to addressing the responsible sourcing of minerals in the region, the State Department issued a broad request for stakeholder input to inform “recommendations.” 

Both the courts and Congress are also active. A legal challenge to the SEC rule is coming to a close, with the opinions of the U.S. Court of Appeals for the District of Columbia Circuit staying intact. In Congress, the specter of legislation seeking to fully or partially repeal Dodd-Frank (similar to bills that were introduced in the last Congress) remains. The Senate Subcommittee on Africa and Global Health Policy is expected to schedule a hearing on the effects of Section 1502 on the Democratic Republic of the Congo (DRC) and the region in the near term.

The SEC’s conflict minerals rule remains in effect. Disclosures for the 2016 conflict minerals reporting period are due May 31, 2017. The SEC’s 2014 partial stay also remains in effect, pending further SEC action or action by President Trump. Under the stay, no company is required to describe its products using the SEC descriptors: “DRC conflict free,” “not found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” An independent private sector audit (IPSA) is not required unless a company voluntarily elects to describe a product as “DRC conflict free” in its conflict minerals reporting.

State Department Seeks Recommendations

In an unanticipated action, the Department of State on March 27, 2017, published a request for comments from stakeholders to inform “recommendations of how best to support responsible sourcing of tin, tantalum, tungsten, and gold.” In the brief notice, the Department provides a high-level overview of U.S. efforts to break the link between armed groups and minerals in the Africa Great Lakes Region. The State Department may be seeking stakeholder input on further actions that could be taken to further responsible sourcing to inform ongoing discussions within the Administration (and in Congress) on alternative approaches to the current Dodd-Frank due diligence and disclosure framework. Comments are due to the Department of State by April 28, 2017.

SEC Request for Comment

On January 31, 2017, acting SEC Chairman Michael S. Piwowar issued two statements regarding the conflict minerals rule. The statements are available here and here. The statements direct staff to “consider whether the 2014 guidance is still appropriate and whether any additional relief is appropriate in the interim.” The statement titled “Reconsideration of Conflict Minerals Rule Implementation” suggests that the current rule and general withdrawal from the region “may undermine U.S. national security interests by creating a vacuum filled by those with less benign interests.” The statements requested comments on “all aspects of the rule and guidance.” Comments were due to the SEC by March 17, 2017. SEC staff will now review the comments received as part of the SEC’s consideration of potential changes to the rule or guidance.

Potential Presidential Action

A recent draft Presidential Memorandum indicates that the White House may seek to temporarily waive the requirements of the conflict minerals rule. Under the Dodd-Frank Act the SEC “shall revise or temporarily waive” the requirements of the conflict minerals rule if the President transmits to the SEC a determination that such revision or waiver is “in the national security interest of the United States and the President includes the reasons therefor;” and establishes a date within two years that the exemption expires. 15 U.S.C. § 78m(p)(3).

The draft Presidential Memorandum states that the conflict minerals rule has caused harm to some parties in the region, thereby contributing to instability in the region and threatening the national security interest of the United States. The draft Memorandum directs the SEC to temporarily waive the requirements of the conflict minerals rule for 2 years and directs the Secretaries of State and Treasury to propose a plan for addressing human rights violations and funding of armed groups in the Democratic Republic of the Congo or an adjoining country within 180 days of the Memorandum.

The draft Presidential Memorandum raises a number of questions without clear answers. For example, it is unclear whether or when the SEC would be required to act as directed by the Memorandum, and whether an SEC action would be subject to notice and comment rulemaking or judicial review. Also unclear is how a temporary suspension of the SEC rule would affect efforts to incorporate conflict minerals reporting obligations into public and private procurement requirements or independent certifications such as EPEAT. It is unclear when the Administration might move forward with a final memorandum.

Status of Litigation

On March 15, 2017, the parties to the legal challenge of the SEC’s conflict minerals rule requested that the U.S. District Court for the District of Columbia enter a final judgment in accordance with the decisions of the U.S. Court of Appeals for the District of Columbia Circuit. In an April 2014 opinion, the U.S. Court of Appeals for the District of Columbia Circuit struck down the portion of the rule that required issuers to describe their products as “not found to be DRC conflict free” because it compelled speech in violation of the First Amendment to the U.S. Constitution. The SEC issued a partial stay of the rule later that month. The D.C. Circuit reaffirmed its decision in an August 2015 opinion and remanded the case back to the U.S. District Court for the District of Columbia for further proceedings. In October 2016, Judge Ketanji Brown Jackson was assigned to the case, but that court had taken no further action. The practical effect of the decision by the parties to request a final judgment from the District Court is that any further changes to the conflict minerals requirements would be left to the discretion of the SEC (unless Congress or the Administration take action first).

New EU Regulation Expected

In November 2016, the European Council and European Parliament came to a final agreement on the European Union’s own conflict minerals regulation. The regulation, the first version of which was introduced in March 2014, establishes an approach that is fundamentally different than that under the Dodd-Frank Act and the SEC rule. Unlike the U.S. scheme, supply chain due diligence requirements under the EU regulation do not extend to downstream users of the metals, including importers of products containing those metals, and instead focus entirely on mandatory due diligence requirements for importers of the minerals, metals, and their ores. The geographic scope of the regulation also extends to conflict-affected and high-risk areas globally, extending beyond the DRC and adjoining countries covered by Dodd-Frank and the SEC rule.

The European Parliament recently voted to approve the regulation and it is expected to be formally approved by the Council before publication in the EU Official Journal later this spring. Importers will be covered by the new due diligence requirements as of January 1, 2021. The new EU requirements are likely to enhance due diligence on the sourcing of conflict minerals from the DRC and other regions. Downstream users or importers of products containing tin, tantalum, tungsten or gold would generally not be subject to the mandatory due diligence requirements, but the Commission is expected to include conflict minerals provisions in the guidance that will set forth the topics to be covered in disclosures by companies covered under the EU Non-Financial Reporting Directive.

Other Initiatives and Upcoming Events

Multi-Stakeholder Forum on Responsible Mineral Supply Chains

This OECD conference is scheduled to take place in Paris from May 2-4, 2017. The meeting will provide the opportunity for a variety of stakeholders to discuss the implementation of the OECD Due Diligence Guidance for Minerals, the ICGLR Regional Certification Mechanism, and other related initiatives. For more information, see the OECD website.

Ongoing Development of new Due Diligence Guidance for Responsible Business Conduct

The OECD is currently developing a general Due Diligence Guidance for Responsible Business Conduct. The comment period closed on February 9, 2017. Draft text and more information can be found at the OECD website.