SEC Rule Mandates Sourcing of 'Conflict Minerals' at U.S. Companies
A long-awaited final rule regarding companies use of so-called conflict minerals was adopted Wednesday by the U.S. Securities and Exchange Commission, putting a new spotlight on compliance.
The rule [PDF] comes under the umbrella of the Dodd-Frank financial reform law and impacts U.S.-listed companies that make use of tantalum, tin, gold, or tungsten in their products. Corporations that do so will have to file a new disclosure form with the SECand make a determination about whether those minerals are sourced from the war-torn Democratic Republic of the Congo and nine surrounding countries.
Tracing that information is where the challenge lies for companies affected by the new rule. They may have a lot of information about their supply chain, but they may never have really looked in the past to see whether any of their products use conflict minerals, says Michael Littenberg, a partner at Schulte Roth & Zabel in New York. And if you have a lot of products, with a lot of components and a lot of suppliers, that may be a big job. (Littenberg maintains a Conflict Minerals Resource Center on his firm's website.)
By the SECs own estimate, the rule could affect more than 6,000 public companies, which are set to face an aggregate compliance cost of billions of dollars. For many firms, says Littenberg, getting their compliance programs in place is going to be time-consuming and expensive.
Littenberg says that in addition to disclosure, compliance will necessitate an exercise in supply-chain managementa complex set of tasks that will fall to in-house counsel, the C-suite, accountants, and others in any company affected by the SEC rule.
But the first, most basic compliance challenge for in-house counsel may be simply figuring out whether the rule applies to your company at all.
This is basically a three-step process, says Obiamaka Madubuko, a partner at McDermott Will & Emery in New York. Step one is: Does this rule apply to me?
The SEC says the new disclosure requirements apply if: The minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company. But that wording leaves room for doubt. The final rules left those terms undefined, says Madubuko, who co-chairs the firms Foreign Corrupt Practices Act & International Anti-Corruption Group. I think theres still a lot of uncertainty as to are we covered?
Step two involves a reasonable country of origin inquiry. In other words: Where did the minerals in questions come from? Did they come from the DRC or adjoining countries? Were those materials coming from recycled or scrap materials?, Madubuko asks.
If a company knows, or has reason to believe, the minerals originated from the DRC and/or other covered countries, then theyll need to append a Conflict Minerals Report to their disclosure. That means you have to hire an independent, private-sector auditor to do due diligence on the sourcing and chain of custody of those conflict minerals, Madubuko says.
For step three, companies would have to post a link to the Conflict Minerals Report on their website, helping to create transparency about mineral sourcing. I think the thrust of this entire rule is to create behavior change through the court of public opinion, according to Madubuko.
During Wednesdays voting session, the SEC also adopted disclosure requirements for publicly traded companies that deal in oil, natural gas, and mineral extraction. Those companies will now have to disclose payments made to the U.S. government and to foreign governments that relate to the commercial development of oil, natural gas, or minerals.
For both that rule and the conflict minerals rule, its important to begin the compliance process as soon as possible, Madubuko says: No matter what your reporting requirements are, the key is, youve got to start now to gather that information.