The US Securities and Exchange Commission (SEC) finally issued its long-awaited conflict minerals rule in August, as mandated by Section 1502 of the Dodd-Frank Act. It requires companies to report to the SEC on the use of any “conflict minerals” sourced from the Democratic Republic of the Congo (DRC) and adjoining countries.
This is the region where a violent conflict has been raging for 14 years, claiming over 5 million lives. The four materials of concern — tin, tantalum, tungsten, and gold — are used in electronic components, jewelry, automobiles, and many other manufactured products. Investors have commended the SEC for issuing its rule requiring companies subject to SEC reporting (and their suppliers) to:
- Determine the origin of any conflict minerals present in their products
- Conduct supply chain due diligence
- Have a third party audit conducted of their due diligence
- File reports with the SEC every year by May 31 (first one is to cover calendar year 2013 and be filed by May 31, 2014).
Before deciding whether it was good or bad for electronics companies, let's look at why it took the SEC so long to issue the final rule. It issued a preliminary rule in December 2010, but didn't issue a final rule until August of 2012.
The rule was delayed due to the large number of comments and questions from affected parties after the preliminary rule was issued. A lengthy comment period was needed because the empowering legislation was an add-on amendment (section 1502) to the Dodd-Frank Wall Street Reform and Consumer Protection Act, rather than a stand-alone law. The usual process of proposing a law, forming a congressional committee, and obtaining input from affected parties was by-passed. The SEC was directed to issue a rule in an area for which it had little or no expertise, without adequate input from affected parties.
It was only after the SEC issued its preliminary rule and reviewed comments from affected parties that it was able to craft a workable final rule. To its credit, the SEC listened closely to affected parties and made necessary changes.
So is this rule good or bad? While nobody can criticize the intent of the rule, there is disagreement over how it will affect both industry and society. Two of the five SEC commission members voting on the final rule were so uncomfortable they voted against it. The two dissenters:
- Said they weren't convinced the rule would be effective in stopping the flow of funds to rebel groups committing human rights abuses in the region
- Expressed fear the rule would encourage illegal smuggling of mined materials out of the region, and that conflict region materials would then be mixed with conflict-free materials
- Said they weren't convinced that targeting manufacturers was the right approach in addressing this issue.
DRC government officials have long voiced concern that the rule could result in companies not buying mined materials from the DRC region. If that happens, it would make conditions worse in the region for those trying to make a living by mining.
So what's the verdict? I don't think anyone in the electronics supply chain is pleased with the legislation process that was followed by Congress or the amount of after-the-fact work that was needed to create a workable rule. Compliance will undoubtedly be a burden on industry. Regardless, if the final rule proves effective in stemming human rights abuses in the DRC region, I think it will have been worthwhile. What do you think?