Tag Archives: Dodd-Frank

SEC Conflict Minerals Filings Status – May 15, 2017

For those keeping track, we are two weeks away from the SEC conflict minerals disclosure filing deadline and here is where things stand:

  • The SEC has not issued any further guidance or statements on the disclosure, the rule or Acting Chair Piwowar’s suspension of enforcement.
  • Newly sworn-in permanent Chair Jay Clayton has not given any public indication about his views or possible actions on the disclosure, the rule or Acting Chair Piwowar’s suspension of enforcement.
  • We are not aware of any action related to Senator Elizabeth Warren’s request for an investigation into the Acting Chair’s authority to issue the enforcement suspension.
  • 60 filings have been submitted – 22 conflict minerals reports and 38 SD-only
  • We continue to see variability in issuers including smelter/refiner lists and countries of origin.  In addition, implausible countries of origin continue to be listed as well – France being the most common.
  • Two IPSAs have been filed, both conducted by the same non-CPA firm.  Elm completed two additional IPSAs not yet filed and we expect a handful of other IPSAs when all is said and done.

More Senate Criticism of Piwowar’s Suspension of Conflict Minerals Rule Enforcement

Yesterday, Senators Cory Booker, Richard Durbin, Sherrod Brown, Christopher Coons, Patrick Leahy and Elizabeth Warren sent a letter to Acting SEC Chair Michael Piwowar to “express our deep concern about your recent instruction to halt enforcement of key parts of the conflict minerals rule.”

The group accused the Acting Chair of side-stepping required rule-making processes:

Any steps to repeal or modify the requirements of the law require action by Congress. Any attempt to modify the rule requires a transparent, formal review and opportunity to comment by all stakeholders. An irregular, ad hoc process inviting comments on an Acting Chairman’s statement is no substitute for this process. As Acting Chairman you do not have the authority to halt enforcement.

In addition, the letter attacked the scope of the suspension compared to the more limited scope of the final NAM v. SEC decision on the First Amendment issue:

While your statement effectively suspends enforcement of all due diligence requirements under Section 1502, the court’s decision invalidated only one specific, severable component of the Conflict Minerals Rule. The inquiry and due diligence measures on source and chain of custody are separate and distinct, and they must each be enforced, In fact, when the National Association of Manufacturers requested a stay of the law, the court explicitly denied the request to affirm that the rest of the rule’s requirements were not severable from the requirement found to be unconstitutional.

In conclusion, the group asked the Acting Chair to “immediately to rescind your directive, and allow full enforcement of the conflict minerals law and rule.”

One interesting aspect of the letter is that two of the six signing Senators participated in the April 5, 2017 hearing on the conflict minerals rule held by the Senate Foreign Relations Committee’s Subcommittee on Africa and Global Health Policy.  During the hearing, Senator Booker also read a statement from Senator Durbin into the record as well.

New GAO Report on Conflict Minerals Regulation – It Just Ain’t Right

GAO just released its latest annual report to Congress on the effectiveness of the conflict minerals regulation.  We’ll save you some effort and boil it down this way:

Essentially, the reporting year 2015 conflict minerals disclosures filed by May 31, 2016 were the same as those filed for reporting year 2014.  I doubt this is much of a surprise.

But what caught our attention is this little twist: GAO is critical of the fact that “an estimated 55 percent of the companies in 2016 reported that they could not definitively confirm the source of the conflict minerals in their products.”  Yet nowhere in the report is there mention that the SEC, under the May 2014 Statement from then-Director of Corporate Finance Keith Higgins, allows companies to file without including a product determination statement.  Due to the legal uncertainty surrounding the rule at the time of the filings reviewed in the report (which was not resolved until earlier this month), many filers chose to submit disclosures without the definitive language GAO is seeking.

But GAO does acknowledge that companies “had taken actions to improve their data collection processes, such as gathering missing information about their supply chains and implementing new technologies to facilitate the data collection process” and that “the process for collecting data on conflict mineral supply chains had become more routine and standardized.”

GAO’s report may be accurate insofar as the literal text of the CMRs, but statements about filers’ inability to determine necessary sourcing information are not so accurate.  While filers may have chosen not to provide specific product determination language in their CMRs, Conflict Minerals Reporting Templates (CMRTs) both from suppliers and provided to customers paint a more accurate picture of a company’s status.

It wasn’t in GAO’s scope to review CMRTs, although the statutory mandate for the annual study doesn’t appear to limit the GAO to SEC filings.  Perhaps next year – assuming there will be a next year for the SEC conflict minerals disclosures – GAO could expand their efforts for a more accurate picture.

How to Say “DRC Conflict Free” Without an IPSA

As the SEC conflict minerals filing deadline closes in, companies are carefully assessing what to say in their Form SDs and conflict minerals reports, especially in light of the recent statement from the Commission about enforcement of the filings.  Certainly, part of the internal deliberations concern how – or whether – to describe product determinations.  If a company voluntarily chooses to use the words “DRC Conflict Free” in its Conflict Minerals Report, then an Independent Private Sector Audit (IPSA) is required.

But did you know that the words “DRC Conflict Free” can be used without triggering an IPSA?

Without going into the painful explanatory details, issuers who file only a Form SD can use the specific determination wording in the Form SD without needing an IPSA.  As SEC stated in FAQ #19,

An issuer is only required to obtain an IPSA of its Conflict Minerals Report and not of the disclosures contained in the body of its Form SD.

The basic rationale is that when the RCOI results indicate there is no reason to believe that necessary conflict minerals did or may have originated from a covered country,  only a Form SD is required and additional due diligence is not necessary.  Therefore, a Form SD-only filing means that products are “DRC Conflict Free” by virtue of the absence of materials from a Covered Country.

But be careful – this only applies to Form SD language.  We also caution against claiming DRC Conflict Free in a Form SD that includes the CMR exhibit – but the CMR doesn’t mirror the Form SD.

We are happy to answer any questions you may have.  Feel free to give us a call.

UPDATED ALERT: Piwowar Issues New Statement on Conflict Minerals Rule in Response to Closure of NAM v. SEC Lawsuit, Stein Pushes Back

SEC Acting Chairman Michael Piwowar and the SEC Division of Corporation Finance Staff both issued statements today (April 7, 2017) on the conflict minerals rule in light of the final Court action in NAM v. SEC.

The statements from both Staff and Acting Chairman Piwowar clarify that the Commission does not intend to recommend enforcement against any issuer that does not file a CMR or conduct due diligence of its smelters/refiners.  The statements do not amend the language of the rule itself to eliminate the CMR and due diligence requirement – they only clarify that no enforcement action will be taken if an issuer triggers the CMR/due diligence mandate, but files only the basic Form SD.

Reuters reported that the only other currently-sitting Commissioner, Kara Stein, took issue with Piwowar’s unilateral action :

The move sparked backlash from SEC Democratic Commissioner Kara Stein, who accused Piwowar of acting beyond his authority to gut the meat of a rule mandated by Congress, adopted by the SEC and reviewed by the courts.

“It is unprecedented for one commissioner, acting alone and without official notice and comment, to engage in de facto rulemaking,” she said.  “It represents a troubling attack not only on the Commission process, but also on the restraints of government power.”

We will continue to monitor new developments and keep you informed.  In the meantime, please do not hesitate to contact us with any questions.

BREAKING: Senator Warren Seeks Investigation into Acting SEC Chairman Piwowar’s Authority to Reconsider Conflict Minerals Rule

Someone please pass the dramamine…

Just when you think the political turbulence on the conflict minerals rule is over, we fly right into another storm.

Yesterday, Senator Elizabeth Warren, along with Senators Sherrod Brown, Robert Menendez and Brian Schatz, submitted a pointed letter to the Securities and Exchange Commission Inspector General Carl Hoecker asking for an investigation into recent actions taken by Securities and Exchange Commission (SEC) Acting Chairman Michael Piwowar.  One of the actions Senator Warren wants reviewed is the January 31, 2017 statement from the Acting Chairman directing the staff to reconsider the conflict minerals rule.

Key excerpts from her letter are below.

Commissioner Piwowar evidently required reconsideration of the guidance on this congressionally mandated rule- which concerns disclosures about conflict minerals originating from the Democratic Republic of Congo and adjoining countries – based exclusively on stories he heard while “visiting Africa last year.” Commissioner Piwowar claims to have “heard first-hand from the people affected by this misguided rule,” and asserts that the rule is putting mining operators out of business while potentially undermining U.S. national security interests.

Commissioner Piwowar has long disliked this required rule, calling it “yet another situation where politically-connected special interests are using shareholder resources to push their own agenda.” But Commissioner Piwowar’s personal distaste for a congressional mandate is not sufficient grounds to attempt to weaken a final rule that has been approved by the SEC. We are also concerned that Commissioner Piwowar appears to have directed the agency staff to undertake this review before consulting with his only fellow Commissioner and seeking her approval.

At his confirmation hearing, SEC Chair-nominee Jay Clayton testified that he … had no specific plans to revisit any Dodd-Frank- mandated rules.

Commissioner Piwowar has “exert[ed] unusual authority for an acting agency chair,”  We ask that you conduct an investigation into each of these decisions to determine whether they are legally permissible…  we ask you specifically investigate the following: …

Did Commissioner Piwowar provide a valid substantive justification for these changes?

Did Commissioner Piwowar provide adequate public notice and comment periods, and did he follow all required SEC guidelines and rules for taking action, including the SEC’s quorum requirements?

Is Commissioner Piwowar carrying out these actions at his own initiative, or has he consulted with, or received direction from, anyone within or outside the Administration?

We will continue to monitor this situation – and will stock up on dramamine.  We’ll try to get enough to share.

The No-Fluff Latest “Must Read” on Conflict Minerals Filings for 2016

The conflict minerals disclosure is still required for calendar year 2016. No Executive Order has been issued, nor has SEC eliminated or modified the rule. Acting Chairman Michael Piwowar did direct the Staff to “to reconsider whether the 2014 guidance on the conflict minerals rule is still appropriate and whether any additional relief is appropriate” but no action has been taken as yet.  Any action that may be taken would most likely follow standard rule making procedures (proposal publication, public comment, Commission adoption of final rule).  Given the timing typically required for the entire process, it is highly unlikely that a rule change will occur before the end of calendar year 2017.

The use of specific product determination wording it still voluntary. The 2014 SEC Guidance remains in effect.

An IPSA is required only when a company voluntarily chooses to use the product determination wording of “DRC Conflict Free” or “Not DRC Conflict Free”. The 2014 SEC Guidance remains in effect.  We expect the number of IPSAs to rise slightly for the 2016 filing.

Companies continue to confuse the smelter/refiner location country with the country of origin.  Quite simply, the country of origin is where the rocks come out of the ground; the smelter/refiner location country is  where those rocks are processed.  These are  frequently different countries.

Companies also continue to report countries of origin that are not plausible sources of production or reserves (e.g., Hong Kong and UAE).  A plausibility review of all countries should be conducted before submitting the Conflict Minerals Report (CMR) to the SEC.  We have developed a comprehensive list of plausible countries of origin from a range of sources including USGS, Department of State and experts in each of the metals trade.  This is used as part of our smelter/refiner verification services.  Contact us if you would like more information.

Six high-risk smelters/refiners are frequently identified by suppliers.    Three of these are related to US-sanctioned entities (Fidelity Printers, Sudan Gold Refinery and Central Bank of DPRK), not conflict minerals.  Issuers need to determine how they will address these within their conflict minerals disclosure, if at all.

The EU conflict minerals regulation has been finalized and differs from the US regulation in that it applies to companies with more than 500 employees, importers of 3TG, contains applicability thresholds and goes into effect in 2021.

Just over 12,000 comments were submitted to the SEC in response to Acting Chairman Piwowar’s request for comments. More than 11,700 of those comments were form letters and just over half of the remaining 300 were submitted by concerned citizens. Approximately 130 comments were submitted by company representatives, industry groups, Congolese society, NGOs and investors. In our view, opinion reflected in the 130 was split relatively evenly for and against the rule. We noted that several of the comments against the rule cited erroneous and outdated information, specifically concerning costs of rule implementation.

The Senate Foreign Relations Committee, Subcommittee on Africa and Global Health Policy is holding a public hearing on April 5 titled A Progress Report on Conflict Minerals.  Yes we will be there.

The US State Department announced they are “seeking input from stakeholders to inform recommendations of how best to support responsible sourcing of tin, tantalum, tungsten and gold.”

Some DC pundits believe that, in the aftermath of the Trump administration and Republican Party failure to succeed on healthcare, Democrats are emboldened to resist efforts to revamp Dodd-Frank. Perhaps, similar to what Mark Twain once wrote, “reports of its death are greatly exaggerated”.

New Comments to SEC Show Ongoing Misunderstanding, Excess Spending for Conflict Minerals Rule

The new public comment period initiated by SEC Acting Chairman Michael Piwowar is now closed and we have reviewed almost all the submittals.  What is surprising is that there still seems to be significant misunderstanding or interpretations of the rule, and some issuers are spending far more than is likely necessary.  The following comments and estimates that caught our attention:

  • Two industry groups cite a company spending $10 million in initial implementation costs and $3 million in ongoing costs (most likely the same company).  We were shocked to see those numbers.  No client of ours, nor any of the many Fortune 500 we have direct or indirect contact with, has expended that much in relation to the Rule.  
  • One company is cited as needing 7 months to survey 300 suppliers.  If that is indeed current information, there are most likely program implementation approaches available that the company is unaware of, or has chosen not to pursue.
  • Another commenter privately disclosed their cost and associated scope of their efforts to us in an email dialogue.  Based on our understanding, that company is expending approximately 90% more effort than needed.  They have received poor guidance on the rule or made a voluntary decision to go down that path.
  • There are multiple references to an estimate of an IPSA costing $250,000 – $350,000 and taking six months.  This estimate appears to reflect the original proposed rule rather than the IPSA objectives and scope of the final rule and the subsequent guidance.  During the proposed rule phase, little guidance was available on the IPSA and the auditing community anticipated full supply chain audits, or audits that confirmed product determinations. The final rule made it abundantly clear that the actual IPSA objectives/scope are far narrower.  

If you think you are spending more than is necessary for your conflict minerals program, give us a call.  We can probably find ways to reduce your effort and costs.

BREAKING: Leaked Draft Executive Order Suspending Conflict Minerals Law

Yesterday, several news outlets reported on what was claimed to be a leaked draft Executive Order that would, if signed by President Trump, suspend Dodd-Frank Section 1502 for a two year period by claiming it is in the US national security interest to eliminate US corporate due diligence activities concerning tin, tantalum, tungsten and gold (3TG).  The document offers no explanation as to  the reasoning behind the conclusion that national security interests are either currently threatened or how national security would improve by the action.  Further, the Executive Order cites incorrect and outdated information about the costs of the Rule.  In the end, none of that may matter as President Trump will almost certainly sign such an Order regardless.

Would that mean all conflict minerals traceability and reporting processes would immediately come to a halt?

No.

First, there will continue to be customer demands for the information regardless of the SEC disclosure requirement, and you will have to meet your customer information requests or possibly jeopardize the business relationship. Second, the Order will very likely be challenged in court as was the President’s recent travel “ban” Executive Order.  Once it goes to court, who knows what will happen and how fast or slow.

We recommend continuing to move forward on the due diligence and reporting activities already underway for calendar year 2016.  But stay tuned – the situation is changing more rapidly and drastically than anyone had imagined.