Business Groups File Challenge to SEC Conflict Minerals Rule

Catherine Dunn

Corporate Counsel

10-24-2012

When the Securities and Exchange Commission adopted the controversial "conflict minerals" rule in late August, many companies began bracing for time- consuming and costly compliance efforts in order to meet the first disclosure deadlines in 2014. But a legal challenge to the rule filed last week adds a new dimension to the timeline—especially given the two Dodd-Frank financial reform rules that have already been struck down in court.

On Friday, the National Association of Manufacturers and the U.S. Chamber of Commerce filed a petition for review in the U.S. Court of Appeals for the District of Columbia. The suit comes in response to a piece of Dodd-Frank regulation that requires public companies to source materials in their products—an exercise meant to target gold, tantalum, tungsten, and tin from Central Africa, where the sale of these minerals helps fuel humanitarian violence.

However, the petitioners think the rule goes too far. "Our organizations suggested constructive changes to earlier proposals to make a final rule workable," a NAM spokesperson said in a statement. "However, the final conflict mineral rule imposes an unworkable, overly broad, and burdensome system that will undermine jobs and growth and may not achieve Congress's overall objectives."

Michael Littenberg, a partner at Schulte, Roth & Zabel in New York, says there's a strong likelihood the application of the rule could get pushed back a year. "It's not realistic to expect that companies are going to significantly ramp up their compliance efforts until there's more clarity around the rule," says Littenberg, whose firm maintains an online conflict minerals resource center.

With that uncertainty in mind, though, companies can still find a middle ground on compliance in the meantime—something Littenberg likes to call "conflict minerals compliance lite."

Consider first the kind of compliance heavy lifting that companies have been figuring out how to contend with. Supply-chain mapping is no ordinary task, particularly for companies with thousands of products and hundreds of suppliers. Companies will need to invest in systems that capture data about what's in their products and where it comes from.

"Historically, a lot of companies haven't organized the data that way," says Littenberg. And with the rule's fate now in up in the air, he adds, "At many companies they're not going to approve these [compliance] expenditures until there's more clarity around the rule."

That said, Littenberg believes companies should still give some thought to compliance in the form of policies, contracts, and disclosures.

Examining your company's supply-chain policies is one place to start. Some firms, Littenberg points out, are striving for a conflict-free supply chain, no matter what's going on in Washington. "A lot of companies feel it's good business and the right thing to do," he says.

Companies can also put the onus on their suppliers to examine the materials in their supply chain. "Requiring their suppliers to go through that exercise doesn't necessarily cost the public company a lot," he notes.

That's an issue that can be addressed contractually. For example, in-house counsel can add provisions to contracts, specifying that the supplier only engage in responsible sourcing. Audit provisions and termination provisions can also bring the company's own supply-chain policy to bear on suppliers.

In-house counsel should also take a look at their risk factor disclosures, says Littenberg. Many firms just saw the end of their fiscal year on September 30 and will be filing 10-Qs with the SEC soon. If you drafted yours a week ago, the disclosure might need tweaks to reflect the additional uncertainty over the rule challenge. "It's revisiting that disclosure with a fresh eye," Littenberg says.

See also: "SEC Rule Mandates Sourcing of 'Conflict Minerals' at U.S. Companies," CorpCounsel, August 2012.