A Major Revamp,if not Repeal, in the Works for the SEC's Conflict Minerals Rule

Electronics companies such as Intel, Apple and HP won't be affected by the latest attempt to kill—the "conflicts minerals" rule. Dynda Thomas, partner and leader of the conflict minerals team at Squire Patton Boggs, said that it is not possible to "un-ring' the conflict minerals bell." Companies shouldn’t stop complying with the rule even if President Trump issues an executive order, she said.
Companies wouldn't stop asking their supply chains for this information, even if the law were repealed, she said. And there would be a legal challenge, Thomas told Bloomberg BNA Feb. 17. 
President Donald Trump's leaked Feb. 8 draft "conflicts minerals" executive order, if and when it surfaces, could waive the rule for up to two years, if he determines that it is in the national security interests of the U.S. based on the instability in the region. The Financial Choice Act proposed by House Financial Services Chairman Jeb Hensarling (R-Texas) would repeal that section of the Dodd- Frank Act entirely. 
If the rule is repealed, this would affect auditors because part of the rule requires independent auditors to confirm—not whether the minerals are "conflict free" but only whether the company complied with the due diligence requirements of the framework—such as the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict- Affected and High- Risk Areas—that it used in its determination.
The rule requires companies that are registered with the SEC whose products contain tin, tantalum, tungsten and gold to trace back their supply chains to make sure their minerals are "conflict free"—not contributing to the wars in the Democratic Republic of the Congo and neighboring countries.

If a company has to file a conflict mineral report describing how they exercised "due diligence" to identify their source and that it is "conflict free," then they need to use an independent auditor. 

Assume a Legal Challenge

Thomas said she fully expected a legal challenge to any executive order by President Trump. In a report on the possiblity of an executive order, Thomas wrote that "many interested parties believe strongly that the rule has been effective and beneficial, and will likely disagree that US national security interests are threatened by the rule."
The U.S. Court of Appeals for the District of Columbia Circuit ruled in Nat'l Assoc. of Manufacturers et al v. SEC, D.C. Cir, No. 13-528,8/18/15/ that part of the conflict minerals rule violated the First Amendment by requiring companies to state on their website that any of their products have not been found to be DRC conflict free. This is unconstitutional compelled speech, the court held.
The appeals court said Aug. 2015 said that the burden is on the SEC to show that the measures it adopted would “in fact alleviate” the harms it recited “to a material degree.”
The case was then remanded back to the U.S. District Court for the District of Columbia for further proceedings. Judge Jackson has ordered the parties to file a joint status report, on or before March 10, 2017, as to whether they need to continue with further proceedings or whether the Court should enter an order of final judgment to effectuate the Circuit’s decision.

Focus on Importers Only.

Regardless of what the U.S. does, the EU regulation on conflict minerals is likely to be finalized, at the mid-February plenary European Parliament session, Thomas said. The EU rule is not limited to the DRC and neighboring countries but to "conflict-affected and high-risk areas around the world.
The EU rule is more narrowly targeted than the U.S. rule, focusing only on those companies who import into the E.U. Thomas said this would allow companies to focus on the approximately 400 worldwide smelters and refiners sourcing practices. When asked by Bloomberg BNA Feb. 17 whether the SEC might adopt this approach to revamping the rule, Thomas answered that "at this point, considering the appointees to the SEC that will be named by the Trump administration she doubted that the SEC will take any such action." Critics of the rule have argued that it has worsened the situation in Africa and that tribal warfare is far beyond the SEC's mandate to protect investors, maintain fair, orderly, and efficient markets and facilitate capital formation. 

Needs Better Contextual Framework.

Sandy Peters, head of the financial reporting group for the CFA Institute told Bloomberg BNA Feb. 21 that at the time the conflict minerals disclosure rule was adopted, it was not done within the context of a conceptual framework but rather seemed to be a one-off misplaced regulation when the other regulations related to the financial crisis.
"I'm for a better framework as to why we include these things, " said Peters.
Picking conflict minerals disclosure at that time during the financial crisis was like picking one feather out of a pillowcase, Peters said, and it was not an issue paramount in the minds of investors. 
Peters said that a conceptual framework can support disclosures associated with all sorts of environmental, social, governance and sustainability drivers that investors have said are material to their investment decision-making process. If conflict minerals is one of those disclosures then it should be included within that type of contextual framework, Peters told Bloomberg BNA.


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