When a regulation requiring ethical business practices falls at the SEC, does it make a sound?
That’s the question issuers might be asking themselves about the commission’s beleaguered Conflict Minerals Rule. The rule grows out of the 2010 Dodd-Frank Wall Street Reform legislation, which required issuers and certain other companies to disclose whether their products contained conflict minerals. Those minerals are the so-called “3TG” – tantalum, tin, tungsten, and gold – the looting of which is fueling the world’s deadliest war in the Congo. The SEC’s implementing regulations went into effect in late 2012, but even six years later, the Conflict Minerals Rule has never gained a sure foothold in U.S. law.
On two different occasions a federal appellate court found that the rule’s disclosure requirements violated the First Amendment. The rest of the rule was left standing, but in 2017, Acting SEC Commissioner Michael Piwowar took an axe to it. On April 7, 2017, he implied that the SEC would cease enforcement of the due diligence and audit requirements of the Conflict Minerals Rule, rendering it largely toothless. (The fact that Piwowar took this action unilaterally was controversial, but that’s another story.)
Ever since, the rule has been in a state of suspended animation. Current SEC Chair, Jay Clayton, has not spoken directly to the issue, and even if he did, Congress might not buy it. After Piwowar came out with his statement, six Democratic Senators responded with a letter saying any steps to modify the rule would “require action by Congress.” Such action has not been forthcoming. The House has tried to strangle the rule, both by cutting off funding for enforcement and through outright repeal in the Financial CHOICE Act, but neither measure made it through the Senate.
Piwowar’s statement, then, remains the last authoritative word on the issue from Washington. It was a firm indication that the Conflict Minerals Rule would not be enforced. But here’s the thing: issuers are still following it. A study by Development International found that for the 2016 filing period, the vast majority of the more than 1,100 issuers who filed conflict mineral disclosures also filed conflict minerals reports, despite Piwowar’s indication that they would face no enforcement consequences for failing to do so. It’s like a tree fell in the Code of Federal Regulations and nobody heard it.
What explains the continued adherence to the rule? It is still technically on the books, and there may be enough ambiguity about the matter that issuers want to play it safe.
It’s also possible, however, that investor concern is inspiring action. Nearly 50 different investor groups, which have gathered under the banner of the Alliance for Human Rights and represent $1.2 trillion (yes trillion) in assets under management have pushed for the continued vitality of the rule. While most have continued to follow the law, the alliance has identified more than a dozen issuers that explicitly pointed to the SEC’s 2017 statements in failing to file CMR reports. It has further criticized the SEC for signaling its unwillingness to enforce the rule, emphasized the importance of CMR disclosures and expressed disappointment in companies that have forgone filing reports. Like Black Rock pushing for change on ESG issues, the Alliance for Human Rights could be having an impact here.
It also seems clear that some issuers genuinely believe in the spirit of the rule, either because they did from the beginning or because they have witnessed its positive impacts. In 2016, the Enough Project reported a whole series of improvements tied to the Conflict Minerals Rule, including improved security for civilians in mining areas, better health standards for miners, and a reduction in armed group control of 3TG mining areas. Meanwhile, companies including Apple, Tiffany, and Intel have all said they don’t want the rule scrapped.