Gut Check

Catherine Dunn

Corporate Counsel

11-01-2012

A long-awaited rule codifying companies' use of "conflict minerals" was adopted in August by the Securities and Exchange Commission, putting a new spotlight on compliance. But the most basic compliance challenge for in-house counsel may be simply figuring out whether the rule applies to your company.

The new rule comes under the umbrella of the Dodd-Frank financial reform law and affects U.S.–listed companies that use tantalum, tin, gold, or tungsten in their products. Corporations that do will have to file a new disclosure form with the SEC—and make a determination about whether those minerals are sourced from the war-torn Democratic Republic of the Congo (DRC) and nine surrounding countries [see "Dirty Minerals and Sunshine" ].

The challenge for companies affected by the new rule lies in tracing that information. "They may have a lot of information about their supply chain," says Michael Littenberg, a partner at Schulte Roth & Zabel in New York, "but they may never have really looked in the past to see whether any of their products use conflict minerals.

"And if you have a lot of products with a lot of components and a lot of suppliers," continues Littenberg, who maintains a Conflict Minerals Resource Center on his firm's website, "that may be a big job." By the SEC's own estimate, the rule could affect more than 6,000 public companies, which together might face billions of dollars in compliance costs. In addition to disclosure, Littenberg points out, compliance will necessitate an exercise in supply-chain management—a 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 complying with the new rule starts with self-assessment. "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."

That wording leaves room for doubt. "The final rules left those terms undefined," says Madubuko, who cochairs the firm's Foreign Corrupt Practices Act and international anticorruption group. "I think there's still a lot of uncertainty as to 'Are we covered?' "

Step two involves an inquiry on the country of origin. "Did they come from the [Congo] or adjoining countries? Were those materials coming from recycled or scrap materials?" Madubuko asks.

If a company knows, or has reason to believe, that the minerals originated from the DRC and/or other covered countries, then they'll 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," she says.

Finally, companies have to post links to the conflict minerals reports on their websites, helping to create transparency about their sourcing. "I think the thrust of this entire rule," Madubuko concludes, "is to create behavior change through the court of public opinion."