Two of the most controversial rules handed over to the Securities and Exchange Commission by the Dodd-Frank Act—so-called conflict minerals and extractive payments disclosure requirements—are all but dead and buried.
The House and Senate both voted last week to eliminate the latter rule, which would have required oil, gas, and mining companies to report the payments they make to foreign and domestic governments for extraction rights. As for the conflict minerals rule—a requirement that companies disclose their use of certain minerals mined from the war-torn Democratic Republic of the Congo—it is on life support, with the SEC’s acting chairman opening public comment for a reconsideration of the rule, a move expected to expedite its demise.
Conflict over minerals
The conflict minerals rule, issued by the SEC in August 2012, requires companies to disclose information each calendar year on the source of tantalum, tin, gold, and tungsten used in their products. Those minerals are known to have funded violent conflict in the DRC and adjoining countries. Companies were required to conduct a “reasonable” country-of-origin inquiry to determine if the minerals originated from the covered countries; track and document the source and chain of custody; and include findings in a public report. When asserting themselves to be “DRC conflict free,” registrants must submit an independent audit to verify the determination.
A lawsuit brought against the rule by the National Association of Manufacturers, U.S. Chamber of Commerce, and the Business Roundtable was resolved in November 2015 when the U.S. Court of Appeals for the D.C. Circuit denied requests from the SEC and Amnesty International for an en banc rehearing—one argued before a full complement of the court’s judges—of an earlier decision that found aspects of the rule to be unconstitutional. Specifically, the court took issue with disclosures and audits that would force companies to declare whether their products do or don’t use the spotlighted Congolese minerals.
The SEC declined an opportunity to petition the Supreme Court for a review of the appellate court’s decision, choosing instead to maintain post-lawsuit guidance that sill required Form SD disclosures and supply chain due diligence, but no longer demanded a declarative admission of conflict minerals use.
On Jan. 31, SEC Commissioner Michael Piwowar directed SEC staff to reconsider whether the guidance is still appropriate and whether any additional relief is appropriate. As part of that process, he launched a 45-day public comment period.
The SEC’s partial stay “has done little to stem the tide of unintended consequences washing over the DRC and surrounding areas,” Piwowar said in a statement. “While visiting Africa last year, I heard first-hand from the people affected by this misguided rule. The disclosure requirements have caused a de facto boycott of minerals from portions of Africa, with effects far beyond the Congo-adjacent region. Legitimate mining operators are facing such onerous costs to comply with the rule that they are being put out of business.”
“The withdrawal from the region may undermine U.S. national security interests by creating a vacuum filled by those with less benign interests,” he added.
“The law under threat exists to deter U.S.-listed oil, gas, and mining companies from cutting secretive deals with corrupt regimes, tyrants, and dictators all over the world—undoing it threatens our national security.”
Corinna Gilfillan, Head of the U.S. Office, Global Witness
The timing of Piwowar’s call for reconsideration is notable. Because the 45-day public comment period will likely extend past his tenure as acting chairman, it allows the next chairman (likely Trump nominee Jay Clayton, a partner with Sullivan and Cromwell) to hit the ground running, armed with plenty of political capital and low-hanging fruit.
Cloudy days for a transparency rule
While the conflict minerals rule lingers on its deathbed for the next eight weeks, Congress swiftly pulled the plug on the thematically similar extractive payments rule. The House of Representatives, on Feb.1, voted 235-187 to repeal the regulation; the Senate, on Feb. 3, advanced the joint resolution to President Donald J. Trump with a 52-47 party-line vote.
The effort utilized the seldom used Congressional Review Act (a vestige of the 1990s, last used in 2001). It allows legislators, with a majority vote, to repeal agency rules that were finalized in the last 60 legislative days. The extractive payments rules, re-issued by the SEC this past summer, fell within that time frame.
Critics of the rule claim it forced publicly traded American energy companies to disclose proprietary information, giving their foreign competitors access to valuable data, while costing nearly $600 million each year in industry compliance costs.
The SEC originally adopted a final rule in August 2012 and promptly faced a legal challenge by the American Petroleum Institute, the U.S. Chamber of Commerce, and other industry groups. The plaintiffs prevailed and, in July 2013, the U.S. District Court for the District of Columbia vacated the rule, opining that the SEC misread the congressional statute when it required the public filing of payment disclosures and that the failure to include an exemption for foreign countries that make payment disclosure illegal was “arbitrary and capricious” under the Administrative Procedure Act.
Enter Oxfam America. In 2014, it sued the SEC to compel it into moving forward with a long-delayed rewrite. The U.S. District Court for the District of Massachusetts, in September 2015, sided with the activists and held the Commission to an expedited schedule for a final rule. The revised rule arrived in July 2016 with several industry concessions intended to satisfy legal concerns.
API was among the rule’s critics applauding the repeal. “The SEC’s rule requires disclosure for American companies but not foreign entities, fundamentally harming American workers and shareholders,” says Stephen Comstock, the American Petroleum Institute’s director of tax policy. “The rule also undermines global payment transparency efforts and is inconsistent with other major international reporting regimes, like the Extractive Industries Transparency Initiative and the European Union’s disclosure rules.”
Sen. Elizabeth Warren (D-Mass.) was among the Democrats who tried, unsuccessfully, to sway the vote. “[One of the Republican majority’s] first orders of business is a giveaway to ExxonMobil that will help corrupt and repressive foreign regimes and make it easier to funnel money to terrorists around the world,” she said, adding that “massive payouts” by oil companies around the world “regularly end up in the pockets of government officials rather than in the hands of the people.”
The following is from a statement by Michael Piwowar, acting chairman of the Securities and Exchange Commission.
In April 2014, the Court of Appeals for the D.C. Circuit held that a portion of the disclosure required by the Commission’s Conflict Minerals Rule violated the First Amendment. Shortly thereafter, the then-Director of the Division of Corporation Finance issued guidance regarding compliance with the Rule in light of the court’s decision and the Commission issued an order staying the effect of the compliance date for those portions of the rule found to be unconstitutional. The case was subsequently remanded to the district court for further consideration. The litigation remains ongoing and the staff’s guidance remains in effect.
In the interim, the temporary transition period provided for in the Rule has expired. And the reporting period beginning January 1, 2017, is the first reporting period for which no issuer falls within the terms of that transition period. In light of this, as well as the unexpected duration of the litigation, I am directing the staff to consider whether the 2014 guidance is still appropriate and whether any additional relief is appropriate in the interim.
I welcome and encourage interested parties to submit detailed comments, and request that they be submitted within the next 45 days.
“These corrupt officials get filthy rich while their citizens face punishing poverty and dangerous working conditions,” she said. “Worse still, some of these undisclosed payments can end up financing terrorists.”
Warren also struck back against critics of the rule who, as was also argued of the conflict minerals rule, don’t see the disclosures as materially relevant to most investors. “Some investors may want to stay away from companies that could face expensive lawsuits for violating the Foreign Corrupt Practices Act or other anti-corruption laws,” she said. “Other investors may just prefer not to invest in companies that could be helping prop up a corrupt foreign government or indirectly financing terrorism.”
Corinna Gilfillan, head of the U.S. office for the advocacy group Global Witness, also raised the issue of national security. “The law under threat exists to deter U.S.-listed oil, gas, and mining companies from cutting secretive deals with corrupt regimes, tyrants, and dictators all over the world—undoing it threatens our national security,” she said.
Global Witness noted that Congress voted mere days after Nigeria’s anti-corruption law enforcement agency seized a billion-dollar oil block from Shell and Eni during a corruption investigation.
“Had the U.S. anti-corruption rule been in place in 2011, this crooked deal would never have gone through, leaving the companies’ investors and the Nigerian people much better off,” it said in a statement. “The deal itself deprived Nigeria’s people of a sum worth 80 percent of its 2015 healthcare budget. Given that the block in question is estimated to hold as much as 9.23 billion barrels in probable reserves, investors face substantial losses from a backroom deal they knew nothing about.”
Oxfam America, which sued the SEC over its delay in reissuing the rule, is promising to fight back. Congress “voted for corruption,” says Isabel Munilla, senior policy advisor for extractive industries. “It is clear today that many elected officials have no backbone when it comes to standing up to big oil. Doing the oil lobby’s bidding, they are undermining U.S. national security, stripping critical investor protections, and promoting corruption all to protect secret oil payments to governments like Russia, China, and other resource-rich countries.”
The two rules have always been a lightning rod, and “there have been a lot of questions—legitimately—about whether they were appropriate areas for the SEC to be involved in,” says Michael Littenberg, a partner with law firm Ropes & Gray. “Even under democratic chairs, the SEC has questioned whether corporate social responsibility matters really should be under its purview. This is really not, strictly speaking, a Republican versus Democrat thing. The prior leadership of the Commission was less than enthusiastic about either of these rules. They were moving forward with them because that is what Congress told them they had to do.”
Don’t expect corporate sustainability and transparency efforts to dissolve away any time soon. “I don’t think that generally speaking, corporations were enthusiastic about the repeal of these rules because they don’t want to do anything,” Littenberg says. “If you look at most large companies—Fortune 500, Fortune 1,000—a lot of them have very vigorous corporate social responsibility programs around a variety of issues, most of which are not areas that are legislated.”
The way that most companies of size and sophistication look at these rules, it is not so much that they disagree with the policy reasons behind them or that they plan to do nothing.
“There is a view that a more flexible response and approach, one that can be tailored to the facts and circumstances of the particular company, makes more sense,” he says. “If you look at sustainability disclosures, one could argue that under certain circumstances there might be obligations to report on some of that in your SEC filings for materiality purposes. There certainly isn’t a specific requirement to put out disclosure on sustainability but, if you look at the S&P 500, most of the companies now publish stand-alone sustainability reports—and they didn’t five years ago. That’s not because they are required to do it by legislation. It is because that is where the market has moved. They are able to do it, however, in a way that makes sense for their particular business, as opposed to needing to fit into a very prescriptive box. It allows for more nuance when you are able to take a more tailored approach and it is not a regulatory filing.”
Another takeaway for both public companies and a lot of their suppliers is that compliance around conflict minerals is not going away. “If anything it will morph,” Littenberg says, adding that post-rule flexibility enables companies to address supply chain issues more holistically. When you have different rules with different reporting metrics and deadlines, it puts you into a box in terms of how and when you do your inquiries,” he says. “You are able to manage risk more holistically when you don’t have as many artificial constraints on how you do these things.”