Votes fell on party lines at the Securities and Exchange Commission this morning to approve two long-delayed rules on conflict minerals and oil and natural gas extractive industry reporting requirements.
Stemming from the Dodd-Frank Wall Street Reform and Investor Protection Act of 2010, final rules were supposed to be considered in April 2011, but the process has been delayed another 16 months because of the complex subject matter and a lobbying battle between industry and transparency groups.
The groups had fought over the size and type of extractive industries payments that must be disclosed.
The SEC has settled on payments over $100,000 at the company and project level. Industry had likewise criticized the difficulty and high cost of auditing global supply chains to identify conflict minerals.
Republican Commissioners Troy A. Paredes — who only voted on the conflict minerals rule – and Daniel M. Gallagher, noted that the now-approved rules have been criticized for exceeding the SEC’s role to protect investors.
“I do not like to see social or foreign policy provisions engrafted onto the securities laws,” Gallagher said before voting against the conflict minerals rule, which implements Section 1502 of the Dodd-Frank Act.
Congress passed the provision in Dodd-Frank as a reaction to extreme violence in the Democratic Republic of the Congo and surrounding countries, which have been funded by proceeds from the region’s mineral wealth.
The Republican commissioners warned that the rule could create a de facto embargo on minerals from the region and could make the human rights situation worse.
The new SEC rule requires electronics manufacturers and other companies who already file with the SEC to report publicly whether their products contain conflict minerals.
The rule applies to companies with products that contain the gold, tungsten, tin or tantalum that are necessary to the functionality or production of a product. Under the rule, each of these companies is required to conduct country of origin inquiries to determine if their minerals come from the DRC and its adjoining countries.
Companies that are reasonably sure that their products aren’t from the region or use scrap or recycled minerals are required to report a description of their inquiry to the SEC. If minerals are found or suspected to be from conflict regions, the new rule requires that the company conduct due diligence on its supply chain that conforms to international frameworks such as the Organization for Economic Cooperation and Development.
The SEC backed off a requirement in the December 2010 proposed rule that required due diligence if a company could not determine that its minerals didn’t come from covered countries. Now companies must only conduct due diligence if they know or suspect that their minerals are from the region. The rule, which requires reporting to the SEC but no actual labeling, classifies products into three categories:
- Minerals can be classified as DRC Conflict Free if they come from the covered countries but did not benefit armed groups.
- Companies are required to audit their reports after they make this determination, according to the SEC.
- If minerals are found to be not “DRC Conflict Free,” a company is required to report on the products manufactured or contracted to be manufactured that are related to armed conflict in the region, along with the facilities that produce them and the origin countries of the minerals.
Transparency group Global Witness criticized the new rule for allowing companies to say that their products are “DRC Conflict Undeterminable” for two years — and four years for smaller companies.
Under this label, companies would be required to report on their supply chain but would not be subjected to an independent private audit during the period
“This is going to create a loophole in the law that companies can take advantage of,” said Jana Morgan, an assistant policy advisor at Global Witness. “This delay is disappointing, and we think it is just leaving the opportunity for this deadly trade to continue in eastern DRC. ”
Commission staff said it weighed the monetary cost of implementing the rule with the unknowable benefit to human rights. The SEC estimates the initial cost of implementing the rule among its issuers is between $3 billion and $4 billion dollars. The ongoing cost is estimated to be between $206 million and $609 million.
Companies will first be required to report publicly to the SEC on May 31 regarding mineral use during the 2013 calendar year. Following the conflict minerals vote, Parades and the Democratic SEC Chairman Mary L. Schapiro recused themselves from the extractive industries vote. They did not explain their conflicts of interest, although it is known that Schapiro previously served on the board of Duke Energy Corp.
Project-level reporting required
The new rule requires oil, gas, mining and other extractive industry companies that file with the SEC to disclose payments governments above $100,000 on both the project and government level. This provision was seen as a victory for transparency groups.
Transparency groups had been concerned that the rule would be watered down to allow companies to report projects in aggregate or require only the total payment amounts made by all companies in the country to be made public.
The rule implements Section 1504 of Dodd-Frank and requires payments to be disclosed if they are related to taxes, royaltes, fees, production entitlements, bonuses, dividends or infrastructure improvements.
Companies that extract oil, natural gas or minerals will have to say the type and total amount made for each project and the type and total amount made to each government.
Gallagher said he could not support the rule because it could hurt U.S. issuing companies who must compete against foreign companies that aren’t required to disclose any payments. Industry groups had fought any rule that required disclosures by individual companies.
“The rules will give foreign oil and natural gas companies access to confidential, proprietary information that they could use against U.S. companies when competing for crucial energy resources around the globe,” American Petroleum Institute Chief Economist John Felmy said in a statement.
The SEC said implementing the extractive rule could cost industries between $44 million and $1 billion, though it cautioned that the staff estimates are likely on the high end of the range. Ongoing costs are expected to be between $200 million and $400 million.
Issuers are required to comply for fiscal years following Sept. 30, 2013. SEC staff said that the extended rulemaking period allowed them to consider a greater breadth of comments from industry and transparency groups.
“I believe our final rule recommendation is much better as a result of the robust comment process,” Meredith Cross, the SEC’s director of the Division of Corporate Finance, said at the meeting. Disclosures related to both rules will be filed in a new Form SD, rather than in a company’s yearly statements.
The commission also consists of Democratic Commissioners Elisse B. Walter and Luis A. Aguilar. Schapiro joined them in approving the conflict minerals rule before leaving the meeting.