SEC Rules on Conflict Minerals: Positive Step but Threat of Lawsuit Lingers

 

Editor’s Note: This initial assessment of the SEC’s conflict minerals regulation is based on information about the new rule provided by the SEC in a factsheet today. The full text of the rule (356 pages) was issued this evening.

After a more than one-year delay, the Securities and Exchange Commission, or SEC, voted 3-2 earlier today to adopt conflict minerals regulations for Section 1502 of the Dodd-Frank Financial Reform Act. On the whole, this was a positive step for Congo and companies. It sets the wheels in motion for companies to finally be able put out fully conflict-free products and invest in a transparent, clean minerals trade in Congo. Although the rule appears to have been weakened to placate the U.S. Chamber of Commerce and the National Association of Manufacturers, the threat of a lawsuit by these associations remains.

The rule, which requires companies to publicly disclose their use of conflict minerals—tin, tungsten, tantalum, and gold—that originated in eastern Congo or neighboring countries, should have an overall positive effect on promoting peace and stability in Congo—but a slow one. The SEC’s rule that companies will be allowed to say “I don’t know where my minerals come from” for up to two years should give firms time to develop systems to purchase clean minerals from Congo. The inclusion of many other companies—for example, companies that design products—should mean that more companies will join audit programs, and smelters will get audited. Several companies told us following the adoption of the rule that they believe that this will lead to more momentum behind the smelter audit programs such as the Conflict-Free Smelter program

However, the possibility of a lawsuit against the regulations remains, as the U.S. Chamber of Commerce has threatened.

“Hopefully the industry associations and far-right groups won’t sue the SEC, essentially suing for the right to foment war in central Africa,” said Congressman Jim McDermott (D-WA) in response to the vote. “It’s time to get on with the transparency that is so badly needed here.”

Nevertheless, the SEC appeared to take away several of the key points of opposition that the Chamber of Commerce had raised, such as unrealistic cost analysis, the burden on small business, and recycling. As a result, the chamber would appear to have little to stand on if it filed a lawsuit. The SEC’s new cost estimate for implementation was much closer to industry’s ($3-4 billion); small businesses received a four-year phase-in; and recyclers will not have to trace as deeply as some had feared. As Jonathan Gold of the National Retail Federation noted, “The staff did take into account a lot of the information that the industry provided.”

The Enough Project, along with other human rights organizations, consumers, industry actors, corporations, and activists, attended the highly anticipated vote this morning and listened to the five commissioners explain their positions on the 3-2 vote. 

“I am pleased that the commission has finalized this very challenging project in such a thoughtful manner,” said SEC Chairman Mary L. Schapiro. “We have received significant public input on this rulemaking, and in response we incorporated many changes from the proposal that are designed to address concerns about the costs. I believe the final rule faithfully implements the statutory requirement as mandated by Congress in a fair and balanced manner.”

The rule includes a two-year phase-in of the audit requirement for larger companies who do not know the origin of the minerals in their products and a four-year phase-in for smaller companies.  Unfortunately, those companies that choose to invest in the region over the next two years (like HP, Intel and Motorola) will incur audit costs for clean minerals coming from the region because the origins of the material can be identified. By contrast, the Nintendo and the Honda manufacturers of the world who choose to claim “I don’t know” are exempt from those audit costs.

From what we have been able to discern based on the factsheet issued by the SEC, the rule maintains the “contract to manufacture” requirement, meaning that a company that commissions another company to produce a product that may contain conflict minerals would itself be obliged to report to the SEC—a provision that retailers had opposed. The final rule does not appear to define manufacture as “necessary to the functionality of” a given product. These two provisions would likely mean, pending a review of the final rule, that more companies will be required to trace and audit their supply chains, though slowly. The inclusion of most companies that use conflict minerals, including retailers, means that more companies will get engaged and likely push forward the process of auditing smelters by joining projects like the Conflict Free Smelter program. This sort of collaboration could help drive the completion of fully conflict-free products. However, further analysis is needed. There are many outstanding questions, such as which companies will have to file; what does the reasonable country of origin inquiry look like; will companies be allowed to rely on supplier representations instead of doing a thorough analysis of their supply chains?

The Enough Project will continue to analyze the impact of these regulations. This initial assessment will be followed by a more in-depth policy brief once we’ve analyzed the full text.

Tracy Fehr contributed to this post.

Photo: U.S. Securities and Exchange building in Washington, D.C. (SEC)

Comments