In previous installments of this multi-part series, I discussed the historical context that was the impetus for Section 1502 of the Dodd-Frank Act as well as the mechanics of the final rule promulgated by the SEC.1 In this installment, I will lay out the current state of the law.
Prior to Rule 13p-1 becoming effective in 2014,2 affected companies struggled to prepare for and comply with its provisions. A PwC survey published in July 2013 (6 months prior to the year the provision became effective) revealed that almost half of the companies surveyed were still in the initial stages of compliance efforts, meaning that they were either in the process of determining whether the rule even applied to them or that they hadn’t even started gathering information.3 Further, over half of those surveyed found no value in following the rule and viewed it only as an exercise in compliance.4 Only 6% of companies surveyed indicated that they would use their efforts in compliance to uncover business opportunities, such as supply chain optimization.5
Neither Section 1015 nor the rule offered guidance as to what an acceptable audit methodology would look like for those companies that would be required to obtain an audit. The only guidance in the statute requires that the audit be performed according to standards promulgated by the Comptroller General in accordance with the SEC, which would mean that the audit must follow procedures identical to those used for annual reports and the like.6 The OECD published guidance on acceptable standards, but their guidance conflicts with SEC auditing standards, so following their guidance may lead to an audit being deemed unacceptable by the SEC.7 Thus, auditors of CMRs were left with no definitive guidance as to the acceptable scope and procedures for their audits.
Finally, companies were confused by the requirement that their reports be “submitted/made available” to the SEC.8 If they were only required to make their reports available, then they would not have to include them in their annual reports, but true “submission” would require their reports to be filed with their 10-K.9 This would subject their reports to much more rigorous audit standards.
Following the confusion outlined above, with companies having trouble meeting the June 2, 2014 filing deadline, the National Association of Manufacturers sued the SEC in the DC Circuit hoping to obtain clarity over their requirements.10 The Court upheld all of the provisions of the rule except for the requirement that companies must publish the results on their websites with labels regarding DRC conflict status.11 The Court stated that requiring such publication was a violation of a corporation’s right to free speech under the First Amendment, and found further that publishing conflict status “conveys moral responsibility for the Congo war… that [the corporation’s] products are ethically tainted.”12
Following this decision, the SEC Corporation Finance Division issued a public statement about compliance with the rule. The statement provided guidance, and held that companies still must submit reports by the due date, but do not have to describe products as “DRC Conflict Free” or the like.13 Further, independent audits only would be required for companies that voluntarily elect to describe products as “DRC Conflict Free.”14
The rule is obviously hotly contested and both regulators and companies subject to regulation face considerable uncertainty as to its validity and enforcement. In the next installment, I will discuss proposals to alleviate these issues, increasing certainty and addressing the root problem more effectively.
See Matt Finan, Conflict Minerals: A Noble Cause, a Controversial Solution, and an Uncertain Future (Part 1 of 2), MBELR Online (Oct. 26, 2016), http://mbelr.org/conflict-minerals-a-noble-cause-a-controversial-solution-and-an-uncertain-future-part-1-of-2/; Matt Finan, Conflict Minerals: A Noble Cause, a Controversial Solution, and an Uncertain Future (Part 1 of 2), MBELR Online (Jan. 22, 2017), http://mbelr.org/conflict-minerals-a-noble-cause-a-controversial-solution-and-an-uncertain-future-part-2-of-2/. ↩
See 17 C.F.R. § 240.13p-1 (2017). ↩
Conflict Minerals Survey: How Companies are Preparing, PwC (July 2013), https://www.pwc.com/us/en/audit-assurance-services/publications/assets/pwc-conflict-minerals-preparedness-survey.pdf. ↩
See Conflict Minerals Proposed Rule, Exchange Act Release 63547, 75 Fed. Reg. 80948, 80957 (Dec. 23, 2010). ↩
OECD to SEC: Make us the Conflict Minerals Due Diligence/Audit Standard for the US, Elm Consulting Group Int’l (July 7, 2011), https://elmconsultinggroup.wordpress.com/2011/07/07/oecd-to-sec-make-us-the-conflict-minerals-due-diligenceaudit-standard-for-the-us. ↩
See Conflict Minerals Adopting Release, Exchange Act Release No. 67716, 77 Fed. Reg. 56274, 56298-304 (Sept. 12, 2012). ↩
Nat’l Assoc. of Mfrs. v. SEC, 748 F.3d 359 (D.C. Cir. 2014). ↩
Id. at 371. ↩
Keith F. Higgins, Statement on the Effect of the Recent Court of Appeals Decision on the Conflict Minerals Rule, SEC (Apr. 29, 2014), https://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541681994#.U3jbG_ldVjQ. ↩
Latest posts by Matt Finan (see all)
- Conflict Minerals: A Noble Cause, a Controversial Solution, and an Uncertain Future – Part III - February 23, 2017
- Conflict Minerals: A Noble Cause, a Controversial Solution, and an Uncertain Future (Part 2 of 2) - January 22, 2017
- Conflict Minerals: A Noble Cause, a Controversial Solution, and an Uncertain Future (Part 1 of 2) - October 26, 2016