• Initial Reactions: Businesses Score on Conflict Minerals, Lose on Extractive Industry Disclosures

News
August 22, 2012
By C.M. Matthews
 
Everyone had an opinion on the decision by the Securities and Exchange Commission to adopt long-awaited rules Wednesday on two controversial provisions of the Dodd-Frank financial reform package that target energy firms and companies that use so-called conflict minerals.
 
No one has analyzed the rules entirely yet, but it seems to safe to say that no one got everything they wanted.
 
The consensus seemed to be that the business community scored some victories on section 1502, the so-called “conflict minerals provision,” that requires companies to examine their supply chains to determine and disclose if their products contain minerals from the Democratic Republic of Congo or surrounding countries.
 
Meanwhile, good governance groups seemed happy with the rules on section 1504,which requires companies to disclose to the SEC all payments made to either the U.S. or a foreign government for the extraction of oil and minerals.
 
Section 1502:
 
Global Witness:
 
“We are extremely disappointed that the rule will allow companies to describe the origin of their minerals as ‘undeterminable’ for a period of two years—or four years for small companies. By allowing companies to say ‘I don’t know where my minerals are from’, the regulators are effectively inviting issuers to evade all of the substantive measures required by the law. The incentive for companies to plead ignorance will be overwhelming.”
 
Michael Littenberg, partner Schulte Roth & Zabel LLP:
 
“Certainly from the proposed rule to where we are now, the final rule is now a much more  favorable rule for the business community. That’s not to say that it’s not going to be onerous and expensive to comply with.
 
“In particular, scrap and recycled conflict minerals are now not always subject to a conflict minerals report, so that certainly reduces compliance costs for companies. And, under the proposed rules there was no ‘indeterminable origin category.’ There is now this temporary period during which companies can indicate that a product’s origin is indeterminable. Those were wins for the business community.”
 
Thomas P. Quaadman, vice president of the Chamber of Commerce’s Center for Capital Markets Competitiveness:
 
“We think that some of the changes the SEC outlined today were positive, but we really need to see the fine print. The phase-in period was important. Some companies have been thinking about this for a while, but many have not. The scrap and recycled exceptions were also helpful.
 
“We think this is better than their initial analysis, but we also think they are still missing the mark to a large degree. The SEC previously said this would affect more than 5,00 companies. What they failed to take into account is that one public company could have hundreds of vendors. So this could affect tens of thousands of small, private companies in the the supply chain.”
 
Section 1504:
 
John Felmy, chief economist at the American Petroleum Institute:
 
“This unilateral approach to revenue disclosure will harm the U.S. economy.  U.S. firms could lose business, U.S. jobs might not be created, and potential revenue to our government could be lost.
 
“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.  State-owned foreign firms could plunder this information to help them determine the strategies and resource levels of their U.S. rivals.”
 
Karin Lissakers, president of Revenue Watch,
 
“While we still need to analyze the many details of the new rules, the SEC’s vote marks the end of secrecy of company payments to governments. These rules should make normal practice what repressive governments and some companies have refused to do, which is tell the public how much companies are paying for natural resources that belong to the countries and their citizens.”
 
Sen. Richard Lugar (R., Ind.), who co-authored Section 1504:
 
“Information is power. It is power for shareholders and power for citizens living under oppressive regimes. With the Cardin-Lugar Amendment, the U.S. is leading the world in the moral and economic necessity to choose transparency over shadow, rule of law over corruption. Now that U.S. law will be implemented, we call on our European colleagues to join us. We will carefully examine the rule approved today so that it conforms with the plain language of the law.”
 
Sen. Ben Cardin (D., Md.), who co-authored Section 1504:
 
“I’m pleased that the SEC has adopted the long-overdue final rule implementing the Cardin-Lugar Amendment. Increased transparency reduces the risk for U.S. investors and allows citizens in resource-rich countries to hold their leaders accountable. Finally, the U.S. has the tools in place to add accountability and stability to the inherently unstable energy sector. It’s now up to the extractive industries and regulators to make sure enforcement of the regulations complies with the intent of Congress. Increased transparency will not put companies that comply at a competitive disadvantage. We also expect, with U.S. leadership, the SEC rule will become the norm for governments and markets around the world.”
 
Paul Bugala, Calvert Investments:
 
“What came out [of the hearing] was a rule that doesn’t allow exemptions for companies that operate in countries with conflicts. More importantly, it acknowledges the material benefit for investors from disclosures. I think we are in a new era. This is a historic moment. This kind of information lets investors know the risks associated with operating in this new era and to value companies properly. There’s an opportunity for companies that are well managed to show they’re managing these risks well.”
 
Ian Gary, Oxfam America:
 
“The SEC finally complied with congressional instructions in Section 1504, but it’s important to see the final rule. We don’t have the details about how the rule will be implemented….It appears from the description in the SEC’s meeting that the Commission largely upheld congressional intent and statutory language, and has not caved to industry lobbying to water down implementation of this landmark provision. Overall, we think from what we’ve seen so far is that the SEC has made good progress on implementing Section 1504.” (Ed. note: Oxfam America filed a lawsuit to force the publication of a final rule; Gary said in response to a question that the suit hasn’t been withdrawn and they’ll decide what to do when the rule is published in the Federal Register.)
 
Christopher Guith, vice president policy for the Chamber of Commerce’s Institute for 21st Century Energy:
 
“It’s horrendous. Based on what they laid out this morning, not only were none of the steps taken that were recommended by us and others to make this more shareholder and investor friendly, there were steps taken that made this worse.
 
“I understand and sympathize with the goal of promoting transparency in resource-rich countries, but what we will likely see here is that national state-owned oil companies will be the only ones in those counties that do not have any disclosure requirements. Now, these guys can go into these countries and know the exact playbook of companies covered by this provision.”