The much-anticipated Securities and Exchange Commission (SEC) rule on "conflict minerals" was approved August 22, 2012. The SEC voted 3 -2 to adopt final rules on a controversial section of the Dodd-Frank Wall Street Reform and Consumer Protection Act aimed at cracking down on the use of certain minerals from the Democratic Republic of the Congo (DRC).
What does the SEC have to do with conflict minerals?
Section 1502 of the Dodd-Frank Act requires the SEC to enact regulations that impose disclosure and, in some instances, audit requirements on publicly tradedcompanies which manufacturer their productsusing "conflict minerals" — tantalum, tin, gold and tungsten originating in or near the DRC. Such minerals are used in a wide variety of products — from medical devices to consumer electronics to food packaging.
Section 1502 requires public companies which rely on these minerals for the products they manufacture to annually disclose whether the minerals originated in the DRC countries. If the conflict minerals originated in the DRC countries, then the issuer must submit a report to the SEC and post on its company website a description of its measures to exercise due diligence, as required by the statute and regulations, on both the source and chain of custody of such minerals.
In response to public comment, the 356-page final conflict minerals rule adopted on August 22, 2012, modified the proposed rule issued on December 15, 2010.
Why should I care?
More than 5,000 companies could be impacted by the rule, according to the SEC, adding an estimated $3 and $4 billion industry-wide to initially implement the new conflict minerals rule, a projection the SEC adjusted upwards from an earlier estimate of $71 million. Although the reporting rule only applies to publicly-traded companies, private companies whose products or supply chain include these minerals should expect to receive inquiries concerning compliance with the law from customers or vendors who are subject to the conflict minerals rule.
Despite the anticipated onerous compliance requirements, some retail firms are breathing a sigh of relief. In contrast to the proposed rule, the final rule includes an exemption for companies which do not exert "some actual influence over the manufacturing of that product." The rule provides that a company is not deemed to have influence over the manufacturing if it merely "affixes its brand, marks, logo or label to a generic product manufactured by a third party." Among other terms, the SEC did not define "manufacturing" or "generic," leaving open significant questions regarding the rule's application.
Other key issues addressed in the final rule:
- Compliance date: Companies subject to the final rule must report to the SEC by May 31, 2014, for the period beginning January 1, 2013.
- Grace period: The final rule permits companies that are unable to determine the source of their minerals to describe the minerals as of "undeterminable" origin for a period of two years from the first reporting period (2013-14). Small entities, defined as having total assets of $5 million or less on the last day of its most recent fiscal year, have a four-year grace period for making these determinations (but not a grace period from reporting if they use the minerals).
- Scrap sources: The final rule also eliminates a proposed requirement to report a company's conflict minerals if they are derived from recycled or scrap sources.
- De minimis amounts: The final rule does not include a de minimis exception, despite intense industry lobbying by companies seeking to avoid reporting trace amounts of conflict minerals.
This rule is the final SEC action. The SEC is an "independent" agency, and the rule is not subject to review or delay by the White House Office of Management and Budget. It is always possible that this SEC rule could be challenged in Federal court by unhappy parties on either side. Certain business groups are interested in Congressional changes or reversal, but given the political calendar, that action could likely not take place until well into 2013.