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Feb 07, 2017

Changing of the Guard: SEC Reconsiders Conflict Minerals Rule While Congress Votes to Overturn ‘Publish What You Pay’ Reporting for Extractive Companies

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In the wake of the US elections in November 2016, two of the Securities and Exchange Commission’s (“SEC”) disclosure rules for public reporting companies — the conflict minerals rule and government payments reporting for extractive companies — have attracted renewed scrutiny from the SEC and lawmakers. Both rules were promulgated by the SEC under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted in 2010.

Conflict Minerals Rule

The SEC’s conflict minerals rule requires companies that manufacture or contract to manufacture products containing tantalum, tin, tungsten or gold to conduct due diligence on their supply chains for these minerals in order to provide greater transparency on responsible sourcing. Calendar year 2016 marks the fourth year of compliance with the conflict minerals rule. In 2014, a US Court of Appeals ruling invalidated part of the original conflict minerals rule, in response to which the SEC’s Division of Corporation Finance (the “Division”) issued a statement providing relief from the provisions of the rule at issue. Specifically, the Division has taken the position that no company is required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free’” or “DRC conflict undeterminable.” An independent private sector audit will not be required unless a company voluntarily elects to describe a product as “DRC conflict free” in its conflict minerals report.

On 31 January 2017, SEC Acting Chairman Michael S. Piwowar issued a statement (see here and here) directing the SEC’s staff to consider whether the Division’s current guidance is still appropriate and whether any additional relief is appropriate. Acting Chairman Piwowar notes that the conflict minerals rule has appeared to have the unintended consequence of causing a de facto boycott of minerals from portions of Africa, given the cost to companies of complying with the supply chain due diligence and disclosure requirements, and he questions whether the rule has had any effect in reducing the influence of armed groups or in easing human suffering in the Democratic Republic of the Congo and surrounding areas. Interested parties may submit comments on the conflict minerals rule, including the SEC’s 2014 guidance discussed above, to the SEC here.  Comments should be submitted by 17 March 2017.

For the moment, however, the conflict minerals rule and the existing SEC guidance remain in effect.

Congress Overturns SEC Government Payments Rule


The Dodd-Frank Act also called on the SEC to make rules requiring resource extraction issuers to disclose payments they make to governments for the commercial development of oil, natural gas or minerals. The SEC’s first attempt at implementing this government payments rule was struck down by US federal courts in 2013. In June 2016, the SEC adopted a new final rule, which was scheduled to come into effect beginning in 2018. In the meantime, Canada and the European Union have adopted substantially similar “publish what you pay” transparency regimes for companies in extractive industries.

In early February 2017, Congress used the Congressional Review Act to enact a joint resolution disapproving the SEC government payments rule, which, when signed by the President, will have the effect of overturning the rule. While the Congressional disapproval does not repeal Section 1504 of the Dodd-Frank Act, which directs the SEC to implement a rule requiring disclosure of payments made to governments by resource extraction issuers, the joint resolution precludes the SEC from reissuing the rule in substantially the same form unless specifically authorised by a new law.

At the time of publication of this client note, the joint resolution of disapproval was awaiting signature by President Trump, at which point it will take effect. Assuming the rule is overturned, for the time being extractive industry companies will not be required to disclose payments they make to governments under SEC rules. However, to the extent such companies are listed on a stock exchange in Canada or the EU, or have certain other connections with Canada or the EU, they may still be subject to similar reporting requirements in those jurisdictions.

Authors and Contributors

Jonathan Handyside

Counsel

Capital Markets

+44 20 7655 5021

+44 20 7655 5021

London

Cynthia Urda Kassis

Partner

Project Development & Finance

+1 212 848 7969

+1 212 848 7969

New York

Jason Lehner

Partner

Capital Markets

+1 416 360 2974

+1 416 360 2974

Toronto