Thursday, September 17, 2020

GAO notes puzzling drop in companies reporting conflict minerals from covered countries

By Mark S. Nelson, J.D.

The GAO issued a report on conflict minerals primarily focused on efforts by the State Department and the U.S. Agency for International Development (USAID) to monitor conflict minerals. Specifically, the GAO recommended the development of performance metrics to measure progress in achieving U.S. strategies to curb trade in conflict minerals. The GAO also noted a puzzling decline in the number of companies reporting to the SEC on Forms SD (specialized disclosure reports) that, after conducting due diligence, their conflict minerals came from covered countries.

According to the GAO report, there is some confusion over why, for those companies that conducted due diligence following a reasonable country of origin inquiry, only 17 percent reported that their conflict minerals came from a covered country (See Figure 2 at p. 15). The GAO noted that for a similar subset of companies, 35 percent made such determination in 2018, and 37 percent made such determination in 2017. The GAO characterized the 2019 figure as "significantly lower" than in prior years and said that the SEC "did not know what factors contributed to the decrease in 2019." The GAO further said it would examine the decline in future reviews.

The GAO’s study of Forms SD consisted of a random sample of 100 of the 1,083 total such forms submitted in 2019. The GAO observed that the 2019 total number of companies filing Forms SD was below the totals for 2018 (34 fewer than 1,117) and for 2017 (82 fewer than 1,165). A footnote to the report indicates that the SEC offered three possible explanations for this decline: (1) mergers and acquisitions within the electronics and semiconductor industries; (2) companies going private; and (3) changed business practices by companies previously required to file Forms SD.

A further potential complicating factor is the several sets of SEC guidance issued in response to the federal court case that partially struck SEC conflict minerals requirements on First Amendment grounds. Guidance issued in 2014 dealt with labeling requirements and independent private-sector audits. The GAO observed that more recent enforcement-themed guidance regarding due diligence issued in 2017, however, is not considered binding on the Commission, which means the Commission could bring related enforcement actions. The GAO noted that SEC staff indicated that the topic of conflict minerals remains on the Commission’s long-term regulatory agenda, but that Commission action was unlikely before at least June 2021.

The SEC provided "technical comments" to the GAO for the report, although the SEC did not provide a comment in response to the specific recommendation made by the GAO. With respect to the GAO report’s single recommendation, the State Department said it agreed with the recommendation and would consider performance metrics in any review of department policy. USAID agreed to support the state Department’s efforts to develop performance metrics. The GAO had recommended that: "The Secretary of State, in consultation with the Administrator of USAID, should develop performance indicators that would enable State to assess progress toward the strategic objectives and goal of the U.S. conflict minerals strategy going forward."