3 March 2017
Trump Administration Could Scale Back Conflict Minerals Disclosure Rule
Acting Securities and Exchange Commission Chairman Michael Piwowar has directed SEC staff to consider further relief from the SEC’s conflict minerals rule. Interested parties are encouraged to submit detailed comments to the SEC by 17 March.
Under the 2010 Dodd-Frank Act and the SEC’s implementing regulations, companies that file reports with the SEC under the Securities and Exchange Act of 1934, whether foreign or domestic, must file a specialised report disclosing their use of tantalum, tin, gold or tungsten originating in the Democratic Republic of the Congo or an adjoining country if those minerals are necessary to the functionality or production of a product they manufacture or contract to manufacture. The minerals at issue are used to make a variety of goods such as cell phones, computers and video game systems, medical equipment, high-speed tools, machine parts, glass and lamps.
SEC regulations require companies that use any of these conflict minerals to conduct a reasonable inquiry to determine whether they originated in the covered countries. If the inquiry determines that the company knows or has reason to believe that the minerals may have originated in those countries, the company must undertake due diligence on the source and chain of custody of its conflict minerals, file a conflict minerals report with the SEC and make that report publicly available on its Web site.
In April 2014 a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit ruled that the requirement to publicly disclose that a company’s products use conflict minerals that have not been found to be conflict-free violates First Amendment protections of free speech by essentially requiring companies to criticise their own products. The SEC subsequently issued guidance advising companies that they would not be required to make such disclosures and issued an order staying the effect of the rule’s compliance date for those portions of the rule found to be unconstitutional. This guidance remains in effect as the litigation, which upheld all other disclosure and reporting requirements in the regulations, remains on-going.
However, Piwowar said the partial stay “has done little to stem the tide of unintended consequences washing over the Democratic Republic of the Congo and surrounding areas.” He asserted that the disclosure requirements have caused a de facto boycott of minerals from portions of Africa, with effects far beyond the Congo-adjacent region, and that legitimate mining operators are facing such onerous compliance costs that they are being put out of business. In addition, he said, it is 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.” A House committee made similar claims in approving in September 2016 legislation that would have repealed the disclosure requirement altogether.
In light of these and other factors, Piwowar is directing SEC staff to consider whether the 2014 guidance is still appropriate and whether any additional relief is appropriate in the interim. It is unclear at this point what form such relief might take. Piwowar also indicated that U.S. national security interests could be undermined if the rule remains in place by driving out legitimate businesses and “creating a vacuum filled by those with less benign interests.” Press sources note that under the Dodd-Frank law a national security determination would allow the SEC to suspend the rule for two years.