SideBar

The GAO reported on companies’ disclosures regarding conflict minerals in April 2017.  That report concluded that companies’ conflict minerals disclosures filed with SEC in 2016 were, in general, similar to disclosures filed in the preceding years.  Just as in prior years, almost all of the companies that conducted due diligence reported in 2016 that they could not determine whether their conflict minerals financed or benefited armed groups in the covered countries.  (See this PubCo post.)

SideBar

That conclusion is consistent with the most recent Conflict Minerals Benchmarking Study from Development International, which analyzed the results of filings for the 2016 filing period. That study showed that there had been progress in validating as conflict-free smelters and refiners of the 3Ts. As of June 30, 2017, the report indicates that 100% of identified worldwide tantalum smelters were participating in the Conflict-Free Smelter Program of the Conflict-Free Sourcing Initiative, with tungsten smelters at 93.5%  and tin at 90.4%.  The laggard, however, was the gold industry, significantly behind at 70.7%. The report attributed the low levels of participation by gold refiners to many causes, including the vast and diversified web of buyers and middlemen in the gold sector, many of whom obscure the true origin of the metal, the delay in introduction of initiatives to trace gold from DRC mine sites to the point of export, and the ease of refining gold (relative to the 3Ts), making it more difficult to tag through chemical analysis and more susceptible of being characterized as recycled gold. operations.  Also, 3T ore can be “fingerprinted” before smelting, whereas gold cannot. In addition, several significant jurisdictions that govern buyers/sellers of gold do not have due diligence frameworks in place, and gold smuggling “is politically tolerated or effectively incentivized through price differences.” (See this PubCo post.)

SideBar

Whether the conflict minerals mandate survives for next year is still an open question.  On April 7, 2017, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule, which provided substantial relief to companies subject to the rule. You may recall that, in the conflict minerals case, National Association of Manufacturers v. SEC, the court held that a part of the conflict minerals rule violated the First Amendment. Corp Fin’s Updated Statement, issued following that court decision, advised that companies would not face enforcement if they performed only a reasonable country-of-origin inquiry and filed only a Form SD and did not conduct detailed supply-chain due diligence or prepare and file a conflict minerals report (Item 1.01(c) of Form SD) or have an audit performed—even if they would otherwise be required to do so under the rule. In a separate Statement, Acting SEC Chair Michael Piwowar commented that the “primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional. In light of the foregoing regulatory uncertainties, until these issues are resolved, it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD.” (See this PubCo post.)  In addition, Corp Fin’s Updated Statement noted that, in response to the invitation of the Acting Chair (see this PubCo post), the SEC had received a number of public comments requesting additional relief and further guidance on the rule.  Piwowar indicated in his Statement that he had instructed the staff to work on a recommendation for future action, taking into account the public comments received. He also noted that “the Department of State has recently requested comment on how best to support the responsible sourcing of conflict minerals.” The action by the State Department could portend a serious reworking of the rule from a different perspective. (See this PubCo post.) In addition, the future of conflict minerals reporting could be entirely in jeopardy: the Financial Choice Act of 2017 would repeal the applicable Dodd-Frank mandate,  although its prospects of passage in the Senate are, at this point, dim. (See this PubCo post and this PubCo post.)