How Congo Became a Corporate Governance IssueA few months ago, the U.S. Court of Appeals for the D.C. Circuit upheld portions of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the “conflicts mineral rule.” The rule, enacted by Congress in July of 2010,requires certain public companies to provide disclosures about the use of specific conflict minerals supplied by the Democratic Republic of Congo (DRC) and nine neighboring countries. In the D.C. Circuit case, the National Association of Manufacturers, or NAM, challenged the SECs final rule implementing the conflicts mineral rule, raising Administrative Procedure Act, Exchange Act, and First Amendment claims. The D.C. Circuit agreed with NAM on its third claim and held that the final rule violates the First Amendment to the extent the rule requires regulated companies to report to the SEC and to post on their publically available websites information on any of their products that have not been found to be “DRC conflict free.” Despite this adverse ruling, the SEC made it clear that the conflicts minerals rule is here to stay: in a statement on the effect of the D.C. Circuit’s decision, the SEC communicated its expectation that public companies continue to comply with those deadlines and substantive requirements of the rule that the D.C. Circuit’s decision did not affect. So, what is the conflicts mineral rule, how far does it reach, and what are public companies doing to comply?

In an unusual attempt to curtail human rights abuses in Africa through regulation of U.S. public companies, the conflicts mineral rule requires companies to trace the origins of gold, tantalum, tin, and tungsten used in manufacturing and to
Continue Reading Despite First Amendment concerns, the conflict minerals rule is here to stay

SEC Staff provide insight as to SEC agendaOn Tuesday, the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals met with officials from the Divisions of Corporation Finance, Investment Management, and Trading and Markets and the Office of the Whistleblower.  While neither new Chair Mary Jo White (confirmed in April) nor new Director of Corporation Finance Keith Higgins (starts at the SEC in June) was present at the meeting, the Staff provided some important takeaways.  Although the two hour meeting covered a significant amount of issues, the most important discussions involved the following topics: 

  • The Staff’s focus will be on Congressional mandates.  Although the Staff couldn’t give timelines, the remaining provisions from Dodd-Frank and the JOBS Act appear to be the focus of upcoming rulemaking activity.   Agenda items such as mandatory disclosure of political contributions, while constantly popping up in the news as imminent, would not fit into the stated focus.  The Staff noted that no one was working on rule making requiring the disclosure of political contributions, which is consistent with Chair White’s Congressional testimony last week
  • Issuers continue to have problems with erroneous reports from the proxy advisory firms.  The Staff noted that they continue to receive complaints from issuers specifically regarding errors, difficulty speaking to the correct person at ISS and Glass Lewis, and overlooking key aspects such as an issuer changing its fiscal year.  The Staff has met with ISS and Glass Lewis over the past year and has requested that the advisory firms improve their transparency.  The Society repeated its concerns with the proxy advisory firms and noted that the issues are acute when dealing with smaller issuers.
  • The Office of the Whistleblower is now adequately staffed and deep in implementation mode.  While only one award has been made under the program, no imminent changes are expected, despite the musings of a recent New York Times article
  • The Staff did a terrific job in responding to no action requests regarding shareholder proposals.  All but 25 requests were responded to in less than 60 days.  The Staff is very cognizant of the costs of missing printing deadlines and therefore reminds issuers to alert the Staff of not only print deadlines, but also notice and access deadlines.
  • The timeline for the four remaining controversial executive pay provisions of Dodd-Frank remains
    Continue Reading Recent meeting between the Society of Corporate Secretaries and Governance Professionals and SEC Staff provides insight

Finally, we have had some recent bipartisanship in Congress.  The only problem, of course, is that the recent bipartisanship further burdened public companies with additional disclosure requirements.  As Broc Romanek noted in his blog last week, Congress overwhelmingly passed the Iran Threat Reduction and Syria Human Rights Act of 2012 requiring public companies to disclose to the SEC its dealings with Iran. 

As we have been blogging about for nearly a year, Congress has picked up a bad habit of burdening public companies in advancing an agenda that has nothing to do with the protection of investors.  These so called “social disclosures” (many of which are really “political” – or politically motivated – disclosures) while arguably related to important issues, burden public companies with specific tasks to compile and disclose certain information.  These same burdens, however, are not placed on private companies.  Yet, Congressman Darrell Issa, the Chairman of the House Committee on Oversight and Government Reform, has been demanding to know why there are fewer public companies today as compared to a decade ago. 

To be fair, I note that the House has recently passed (in bipartisan fashion) HR 4078, Red Tape Reduction and Small Business Job Creation Act, which would limit the ability of the SEC to add more regulatory burden on public companies, but given recent Congressional acts, HR 4078 appears more “Do as I say and not as I do.”  For example, Congress passed the American Jobs Creation Act of 2004, which requires public companies to disclose in its Form 10-K if the company incurs a specific type of tax penalty from the IRS involving abusive or tax avoidance (shelter) transactions.  More recently, as everyone is keenly aware, laws have passed pertaining to conflict minerals, mine safety, and executive compensation pay ratios.  Laws that have been proposed, but have not passed (yet), include
Continue Reading You asked for it: Bipartisan agreement in congress

As mentioned on Brock and Dave’s Blog and a recent article by Bloomberg, the conflict minerals disclosure required by the Dodd-Frank Act appears to be close to final.  These proposed rules are highly controversial because of the estimated high costs for public companies to comply with the new rules compared to the small perceived benefit to investors.  In fact, we have previously blogged regarding the likelihood that the SEC has grossly underestimated the compliance costs.

Under the proposed conflict minerals rules, companies must disclose whether certain minerals used in production chains originate from the Democratic Republic of the Congo or its neighboring countries.  Minerals sourced from these areas of central Africa often fund militia and other military groups’ operations which have exacerbated internal conflicts and human rights violations.   Congress believes that by requiring these disclosures public companies may be encouraged to seek alternative sources, materials, or suppliers to project a more socially responsible image to consumers.

In a letter to the SEC, Senator Leahy and other members of Congress have taken issue with the proposed final rules apparently circulating around the Capitol.  In the letter, the Senator and his colleagues have informed the SEC that they believe the proposed final rules contravenes Congress’s legislative intent by allowing the conflict mineral reports to be “furnished” rather than “filed.”  The difference, of course, is not just semantics.  Items “filed” in periodic reports are subjected to liability under the Securities Act of 1933, including Section 11 and Section 12(a)(2), because the information is incorporated by reference into Securities Act registration statements.  Items “furnished” are subject only to liability under the Securities Exchange Act of 1934, primarily Rule 10b-5.  Because Section 11 liability presents essentially “strict liability” for issuers, it would be much easier for a plaintiff to win a judgment against an issuer for faulty conflict minerals disclosure if the disclosure is “filed” rather than “furnished.”

Whether or not the legislative intent espoused by Senator Leahy in his letter is correct, we believe the foundation of the entire law is flawed.  As we have blogged before, we strongly disagree with the increasing frequency in which social policy has been weaved
Continue Reading Conflict minerals rule may be reaching a conclusion