Tuesday, September 05, 2017

Rep. Waters asks SEC to make conflict minerals enforcement a priority

By Mark S. Nelson, J.D.

House Financial Services Committee Ranking Member Maxine Waters (D-Calif) and Rep. Gwen Moore (D-Wis) asked the Commission to ensure that the conflict minerals rule will be enforced despite the issuance of additional guidance from the Division of Corporation Finance earlier this year that recommended against enforcement if companies do not comply with the due diligence provisions of the rule. Waters and Moore expressed their views in a letter to SEC Chairman Jay Clayton.

Guidance reconsidered. Former Acting Chairman Michael Piwowar had instructed SEC staff to review the April 2014 guidance on conflict minerals. That guidance provided detailed instructions for compliance following a D.C. Circuit decision invalidating part of the rule. The resulting April 2017 guidance did not supersede the earlier guidance, but it added that enforcement would not be recommended if companies do not file due diligence disclosures. Specifically, the new guidance said:
In light of the uncertainty regarding how the Commission will resolve those issues and related issues raised by commenters, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD. This statement is subject to any further action that may be taken by the Commission, expresses the Division’s position on enforcement action only, and does not express any legal conclusion on the rule.
Piwowar had previously noted his own visit to Africa, which he said informed his view that the rule is “misguided.” He would later conclude that “[i]n 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.”

The April 2014 guidance on conflict minerals was issued after the D.C. Circuit held a part of the rule violated the First Amendment; the court described the reach of its holding thus:
… to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”
A majority of the D.C. Circuit panel later re-affirmed its decision, albeit in a manner consistent with a subsequent First Amendment decision by the full D.C. Circuit in another type of case. Former U.S. Attorney General Loretta Lynch then responded to an inquiry by Speaker Paul Ryan (R-Wis) stating that the government would not appeal the D.C. Circuit’s conflict minerals decision to the Supreme Court. The district court has since issued a final judgment remanding the rule to the Commission.

Congressional concerns. Waters and Moore characterized the SEC’s 2017 “non-enforcement position” as “misguided and irresponsible.” They assert that the latest SEC guidance is prone to misinterpretation that could lead companies to make compliance decisions that may hurt their reputations. (As an aside, note that Exchange Act Section 18 can result in a company being liable for documents “filed” with the Commission.)

The congresswomen note that Piwowar had voiced doubts about whether the conflict minerals rule is effective. But Waters and Moore contend that supply chain “visibility” is now much better because of the conflict minerals rule. Waters and Moore also note efforts in Central African countries and by other organizations to further improve conditions within the conflict minerals trade, including efforts by the International Conference on the Great Lakes Region.

Waters and Moore suggested other reasons the SEC should not reconsider or weaken the conflict minerals rule. For one, citing a report by Elm Sustainability Partners, the congresswomen assert that compliance costs are lower than the SEC predicted and that elimination of the rule would not address all such costs. Waters and Moore also dispute Piwowar’s claim of a de facto embargo against conflict minerals sourced from the Democratic Republic of the Congo (DRC); Waters and Moore noted companies’ initial reluctance to source these minerals from the DRC, but also cited reports that lawful DRC minerals exports had resumed.

Moreover, the congresswomen challenge Piwowar’s assertion that U.S. national security interests may be hurt by the conflict minerals rule. Waters and Moore said the conflict minerals rule gives the U.S. a platform to influence mining in Central Africa that supports U.S. national security interests. According to Waters and Moore, citing a comment letter by the Congolese Minister of Mines, the revision of the conflicts minerals rule could foster renewed instability in the DRC. Waters and Moore also note the financial and reputational risks to companies who obtain conflict minerals from armed groups.

The Dodd-Frank Act provides that the Commission can revise or temporarily waive conflict minerals rule requirements if the president transmits a determination to the commission that revisions or waivers: (1) are in the U.S.’s national security interest and the president states his reasons for this finding; and (2) provides that an exemption will expire two years after it is published. The conflict minerals rule’s disclosure requirements also can be terminated if the president “determines and certifies” to Congress “that no armed groups continue to be directly involved and benefitting from commercial activity involving conflict minerals.”

OIG says Piwowar had authority. In March, several months into the SEC’s reconsideration of the April 2014 guidance, but before the latest conflict minerals guidance was issued, Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) and three other senators asked the SEC’s Office of the Inspector General to investigate whether Piwowar had the authority to take action regarding conflict minerals and other rules. The senators were concerned about the import of Piwowar’s status as acting chairman and his lack of Senate confirmation for that role and the existence of a non-traditional quorum of the Commission.

The SEC’s OIG has since concluded that Piwowar acted within his authorities. Specifically, the OIG found that Piwowar: (1) had authority for his actions as acting chairman; (2) did not violate procedural requirements or act without “adequate justification;” (3) did not undermine the SEC’s mission; and (4) did not waste SEC resources.

These findings were largely based on Reorganization Plan No. 10, which gives the president authority to designate an SEC chairman and which does not restrict an acting chairman’s powers. Moreover, the SEC’s own regulations provide for a quorum of the Commission when there are only two commissioners. As a result, Piwowar’s statement on and call for public comments regarding the conflict minerals rule was not “agency action” that would require a quorum or otherwise require Piwowar to obtain the second commissioner’s approval.