Trade Compliance

GHY discusses changes to international trade regulations and explores cutting-edge compliance strategies.

SEC Suspends “Conflict Minerals” Audit & Due Diligence Compliance Enforcement

Posted April 10, 2017


The U.S. Securities and Exchange Commission has announced that it is indefinitely suspending enforcement of the costliest and most burdensome aspect of its embattled “conflicts minerals” rule, following a court decision remanding it back to the regulator because a key part of the legislation was found to be unconstitutional.

According to final judgement issued last week by the U.S. District Court for the District of Columbia upholding an earlier decision of a U.S. appeals court, Section 13(p)(1) and Rule 13p-1 thereunder of the Securities Exchange Act violates the First Amendment of the U.S. Constitution because it compels regulated companies to publically disclose if their products contain “conflict minerals” from a war-torn part of Africa.

Plaintiffs in the original lawsuit, which included the Business Roundtable, the U.S. Chamber of Commerce and the National Association of Manufacturers, argued that the provision called for by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) unduly forced them “to furnish politically-charged information that is irrelevant to making investment decisions.”

The business groups also complained that tracing the source of any tantalum, tin, gold or tungsten used in their products and then continuously monitoring it throughout their supply chains is impractical and creates an unreasonable financial hardship.

Acting SEC Chairman Mike Piwowar, issued a statement on Friday indicating that in light of the court remand he has accordingly instructed the commission's staff to begin work on a recommendation for future action regarding overall implementation of the conflict mineral rule, “including whether Congress’s intent in Section 13(p)(1) can be achieved through a descriptor that avoids the constitutional defect identified by the court.”

Until such time as “regulatory uncertainties” concerning the rule are resolved, Pinowar said, “it is difficult to conceive of a circumstance that would counsel in favor of enforcing” the “extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals.”  

It should be noted that Piwowar, a Republican nominated to the SEC in 2013 by the Obama administration and recently designed acting head of commission by President Trump, is an outspoken critic of the conflict minerals rule, which he has described as “misguided” and responsible for causing a “tide of unintended consequences washing over the Democratic Republic of the Congo and surrounding areas.”

In a January 31 directive calling for reconsideration of the conflict minerals rule implementation, Pinowar stated that: “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. It is also unclear that the rule has in fact resulted in any reduction in the power and control of armed gangs or eased the human suffering of many innocent men, women, and children in the Congo and surrounding areas. Moreover, the withdrawal from the region may undermine U.S. national security interests by creating a vacuum filled by those with less benign interests.”

Although regulated companies will not need to conduct a due diligence review or an audit until the commission’s guidance on the conflict minerals rule is settled, they will still be required to perform Reasonable Country of Origin Inquiries (RCOIs) to demonstrate conformance to the OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, or compliance to the Dodd-Frank Act, as they have been doing since the partial stay in 2014.