House Financial Services Committee members Maxine Waters (D-MO) and Gwen Moore (D-WI) (collectively, the “representatives”) criticized the treatment of the Conflict Minerals Rule (the “Rule”) (Exchange Act Rule 13p-1) by SEC Commissioner Michael Piwowar and the SEC Division of Corporation Finance (the “Division”).
In a letter to SEC Chair Jay Clayton, the representatives argued that Commissioner Piwowar’s position on the Rule is inconsistent with court rulings and could expose companies to “reputational risk” by leading them to believe they are not subject to the Rule’s disclosure requirements. The representatives contend that the Division’s non-enforcement position on companies that fail to “comply with the disclosure requirements regarding due diligence on the source and chain of custody of conflict minerals or file a conflict minerals report” is “misguided and irresponsible.” The representatives complained that Commissioner Piwowar and the Division are using the ruling of the U.S. Court of Appeals for the District of Columbia Circuit – that the SEC cannot enforce the “descriptor” requirement of the rule – to improperly inform their non-enforcement position on the due diligence reporting requirement.
In the letter, the representatives stated that the Rule allows companies to understand how their business practices “directly or indirectly financ[e] conflict and human rights abuses.” The representatives cited the “positive” effects of the Rule, including increased efforts to validate conflict-free mines, the implementation of monitoring systems, and improvements in supply-chain management. The representatives argued that contrary to the position taken by the Commissioner and the Division, the Rule (i) does not impose excessive compliance burdens on companies, (ii) has not created a “de facto embargo” on minerals from the eastern Congo, and (iii) does not have an adverse effect on U.S. national security interests.
Lofchie Comment: The representatives make the strongest argument they can that the “conflict mineral” disclosure requirement is providing material benefits. While they do a solid job of letter-writing in this regard, certain of the arguments in the letter are fairly far-fetched (e.g., that companies somehow are exposing themselves to reputational risk by relying on SEC guidance). The representatives also ignore, and do not attempt to refute, the finding of the U.S. Government Accountability Office that the disclosure rules have been a near-total failure. See GAO Director Updates Senate Subcommittee on Conflict Mineral Rule Disclosure. Even if one believes that the Rule does some good notwithstanding the GAO report, it’s simply hard to imagine that it is an economically efficient way of doing good.