Conflict Minerals Reporting and Record-keeping Requirements Update

Hana Hispa
February 2018 LexiTimes

The Dodd Frank Act introduced a new non-financial disclosure requirement for US companies that file reports to SEC under the Securities and Exchange Act and that manufacture (or contract to manufacture) products for which certain minerals are functionally necessary. John Montaña commented on the subject in 2013 when rule 1502 went into effect. Click here to see his article.

It has now been more than four years since companies have had the obligation to track their tin, tantalum, tungsten and gold (“3TG”) supply chain and make disclosures (and further due-diligence when applicable) regarding whether or not their products have been or may have been produced using minerals acquired in the Democratic Republic of the Congo (“DRC”) or adjoining countries (and thus may directly or indirectly finance or benefit armed groups). During the course of these more than four years the situation has changed – on one hand towards easing regulatory requirements in the US, and on the other adding new obligations for companies that import 3TG to the European Union.

In the US, the new rule (Securities Exchange Act Section 13(p)(1) and Rule 13p-1 thereunder) was challenged, with partial success, soon after its issuance. In 2014, the Court of Appeals for the District of Columbia Circuit found some of the requirements conflicting with the First Amendment’s free speech provisions. According to the Court, the rule violates the First Amendment in that it requires companies to report whether any of their products have not been found to be conflict minerals free.

The Security & Exchange Commission did not seek the Supreme Court’s review of the Court of Appeals. Instead, the Commission followed with a partial stay of the rule in 2014 stating 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.” Additionally, an independent private sector audit (IPSA) is only required when a company voluntarily chooses to describe a product as “DRC conflict free” in the company’s Conflict Minerals Report.

In April 2017, following the Court’s remand of the case to the SEC, the Commission confirmed its position and issued a statement in which it provided that it would not recommend the enforcement of the part of the rule that requires conducting due-diligence in cases where the company knows that its minerals may have come from the DRC or adjoining countries (1.01 (c) of Form SD). The rule is still under review at the SEC awaiting the determination of the Financial Choice Act bill that has passed through the House in June 2017, which includes the repeal of section 1502 of the Dodd Frank Act.

In the meantime, the EU has finally published its version of a conflict minerals regulation (Regulation (EU) 2017/821) that importers of designated minerals will have to comply with by January 2021. Similarly to the US, the long-discussed regulation requires importers to conduct due diligence of its supply chain. Unlike in the US, the regulation also expressly states that importers are obliged to keep documentation demonstrating their compliance; otherwise there are few differences between the SEC rule and the EU Regulation.

US companies continue to operate in an uncertain legal environment when it comes to their conflict minerals reporting obligations. For now, they still need to file required forms with the SEC and do origin inquiries as they have been doing in previous years. EU importers are well advised prepare for the new 2021 3TG regulatory environment.

Finally, even if the US rule is repealed (and thus US companies that do not import to the EU would not be legally obligated to disclose their conflict minerals sourcing), public awareness of the issue (conditions under which the minerals in question are being mined and the connection to the financing of armed groups) on the side of consumers and non-governmental organizations will likely continue to create pressure toward monitoring 3TG supply chains. Companies may, based on their business decision and/or company mission (and in spite of the cost), consider continuing their due-diligence and conflict-minerals-supply-chain related record-keeping efforts regardless of the possible lack of authoritative legal obligation.
Hana Hispa
February 2018 LexiTimes

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