The first Dodd-Frank conflict minerals reporting deadline came and went on June 2, 2014. Some 1,300 companies filed conflict minerals disclosures with the U.S. Securities and Exchange Commission (SEC). The SEC, industry groups, and NGOs are still sorting through the filings, but already several themes have emerged. We highlight some of these below along with related legal developments that are likely to inform the approach companies take to meet their due diligence and disclosure obligations in the current year.
- Significantly fewer companies filed disclosures than either industry or the SEC anticipated. At the time the SEC issued its final rule and economic analysis, it estimated some 6,000 companies would file Form SD conflict minerals disclosures with 4,500 of those companies filing Conflict Minerals Reports. Only about 1,300 companies filed form SD disclosures and about 1,000 of these companies filed Conflict Minerals Reports. It is unclear what caused this discrepancy, although a better understanding of the scope of the products covered by the rule, discussed further below, may have contributed.
- Most companies that filed Form SD disclosures went on to conduct full due diligence and file a Conflict Minerals Report. The high percentage of reporting companies that filed a Conflict Minerals Report as an exhibit to their Form SD disclosures—nearly 80% according to surveys—suggests that the SEC rule’s inclusion of a reasonable country of origin inquiry (RCOI) step did not enable many companies to avoid the requirement to conduct heightened due diligence based on a conclusion that they had “no reason to believe” minerals were sourced from the covered countries. Costs associated with implementing the SEC Rule may therefore have been higher than the SEC anticipated for filing companies (particularly since the SEC predicted that only 75% of covered issuers would be required to file a Conflict Minerals Report).
- NGOs criticized broad failure of companies to determine conflict status of products. It has been widely reported that the overwhelming majority of filing companies were unable to determine where the tungsten, tantalum, tin, or gold in their products originated and whether those minerals financed or benefitted armed groups. The SEC rule allows companies to describe their products as “DRC conflict undeterminable” for the first two years (four years for smaller companies) while they develop and implement their reporting compliance programs. In the wake of the D.C. Circuit conflict minerals ruling, the SEC issued guidance clarifying that companies would not be required to use any specific language to describe products. While some companies nonetheless elected to use the phrase “DRC conflict undeterminable,” the majority of companies reported uncertainty in their results but avoided using the descriptor “DRC conflict undeterminable.” The overall trend toward companies not drawing conclusions about the origin and conflict status of minerals contained in their products, though permissible under the SEC rule and guidance, has drawn criticism from some advocacy groups active on the issue. Global Witness argues the majority of reports filed by companies are “inadequate” and indicate a widespread failure to implement the due diligence Global Witness believes is necessary to comply with the SEC rule. At the same time, however, the Enough Project reports conflict minerals disclosures have helped reduce the involvement of armed groups in DRC mines.
- Most companies did not provide smelter information in their disclosures. For products that would have been described as “DRC conflict undeterminable” or “not found to be DRC conflict free” but for the D.C. Circuit ruling described below, the SEC advised companies to provide “the facilities used to process the necessary conflict minerals” in such products, if known. While some companies provided smelter information in the form of a list of smelter names or a reference to the number of identified smelters, the majority of companies—75% according to a recent survey—did not provide any information about the smelters in their supply chains. One reason for the lack of information on smelters in company disclosures appears to have been the reported practice of many first tier suppliers to aggregate, using an industry standard template, smelter information for their entire supply chain (i.e., across all of the supplier’s products and materials) rather than provide customized smelter information for individual product lines or individual customer companies. As a result, reporting companies may have had difficulty evaluating whether smelters listed in an aggregated template actually processed minerals contained in the companies’ products.
For more information on reporting trends and outcomes, see, for example, the Ernst & Young report analyzing first year conflict minerals disclosures or download the Source Intelligence Conflict Minerals Year in Review.
D.C. Circuit Meat Labeling Ruling May Impact Conflict Minerals Litigation
In April, 2014, the U.S. Court of Appeals for the D.C. Circuit struck down portions of the SEC conflict minerals rule that it found violated First Amendment free speech protections in Nat’l Ass’n of Manufacturers v. SEC. The court held the requirement in the conflict minerals rule to describe products as “not found to be ‘DRC conflict free’” was compelled speech in violation of the First Amendment after applying the “heightened scrutiny” test. In anticipation of a ruling in a separate case involving whether the more lenient “rational basis” test can be applied to First Amendment challenges outside the consumer deception context—American Meat Institute v. U.S. Dept. of Agriculture—the SEC and intervenor Amnesty International petitioned the D.C. Circuit for rehearing en banc of the conflict minerals case. On August 28, 2014 the D.C. Circuit ordered the industry group petitioners to file a response to the SEC and Amnesty International petitions for rehearing, indicating the court is taking those petitions seriously.
The D.C. Circuit issued its decision in American Meat Institute July 29, 2014 and upheld USDA regulations requiring country of origin labeling of meat products sold in the U.S. after applying the “rational basis” test. The court, en banc, held that this test applies outside the consumer deception context to government-required disclosures of “purely factual and uncontroversial information.” The decision also expressly overruled the conflict minerals decision to the extent it limits the rational basis test to cases involving consumer deception. Given the American Meat Institute decision, it seems likely the D.C. Circuit panel will grant the SEC’s motion to rehear NAM v. SEC, and that a primary focus of the rehearing will be whether the phrase “not found to be ‘DRC conflict free’” is “purely factual and uncontroversial information” such that rational basis review (and not heightened scrutiny) should have been applied.
Department of Commerce Publishes List of Worldwide Conflict Mineral Processing Facilities
Dodd-Frank Section 1502(d) requires the Department of Commerce (Commerce) to provide an annual report to Congress containing a list of all known conflict minerals processing facilities worldwide. The deadline for submitting the first report was January 2013. In a U.S. Government Accountability Office (GAO) report to Congress in June 2014, the GAO noted that all other U.S. government agencies except Commerce had undertaken the actions required by section 1502 and urged Commerce to fulfill its overdue mandate under the law.
On September 5, 2014, Commerce published its long-awaited report and list of processing facilities. According to the report, the list includes all known facilities that process tin, tantalum, tungsten or gold but does not indicate whether a specific facility processes minerals that are used to finance conflict. The list reflects Commerce’s efforts to accumulate, compare, contrast, and reconcile facility information from seven different sources of information, including primarily the U.S. Geological Survey with supplemental information from other sources such as the Organisation for Economic Co-operation and Development, the Electronic Industry Citizenship Coalition and the related Global e-Sustainability Initiative. While the report states that Commerce did not perform any on-site verifications, it used other web-based diligence tools to confirm the existence of these facilities.
The report notes several limitations and challenges in developing the list, including the existence of artisanal miners processing small amounts of materials that are difficult to trace to smelters, evidence of “guerilla” smelting operations throughout Africa that use makeshift smelters to produce intermediary forms of the minerals before shipping them overseas, and the fact that the Shanghai Gold Exchange (which accounts for 15-20% of all gold used for commercial purposes, according to Commerce), does not maintain records on gold sourcing. Notwithstanding these limitations, Commerce describes this list as “the most comprehensive list to date” of all known processing facilities in the world.
SEC Confirms Compounds Are Excluded from Disclosure Requirements
The SEC has reportedly confirmed that, at least in some circumstances, it does not consider the use of chemical compounds manufactured from conflict minerals—such as catalysts, stabilizers, and polymerization aids—to be covered by the SEC rule. While the SEC has not recorded this interpretation in writing, a June 6, 2014 letter from counsel for an industry coalition, available here, memorializes a conversation during which SEC staff verbally confirmed the exemption. This interpretation would reduce significantly the scope of affected products by excluding common compounds, such as organotins found in many plastics. Many reporting companies appear to have anticipated this interpretation in their inaugural disclosures even without explicit guidance from the SEC. It is important to note that while the use of chemical compounds might not subject an issuer to disclosure requirements, the manufacture of those compounds is covered.
President Issues Executive Order Expanding List of Sanctionable Actions to Include Dealing in Minerals Supporting Conflict in DRC
On July 8, 2014, President Obama signed an executive order that gives the U.S. expanded flexibility to implement sanctions against individuals and entities contributing to the conflict in the DRC. The order, available here, amends a 2006 executive order to better bring U.S. sanctions criteria in line with U.N. Security Council resolutions. The order is worded very broadly, causing some to ask whether it may be used to levy sanctions against U.S. companies with even tenuous ties to conflicted-affected mines in the DRC.