Court Upholds Conflict Minerals Rule

Companies awaiting the outcome of a legal challenge before starting to comply with the Securities and Exchange Commission's Conflict Minerals Rule received a blow in July when a US district court rejected that challenge.

Recent reports have shown that many companies have been laggard in starting compliance activities. A recent PwC study showed that 16.7 percent of companies had done little or nothing to comply, while another 32.6 percent were just getting started. A poll conducted by IHS showed the situation to be even worse than that.

We're now less than a year away from when the first reports under the rule need to be filed.

The conflict minerals regulation adopted by the SEC under the Dodd-Frank Act requires publicly traded companies to annually disclose information on the source of conflict minerals — tantalum, tin, gold, or tungsten sourced from the Democratic Republic of Congo (DRC) — contained in their products. Companies will have to begin to file this with the SEC information starting in May 2014 and to disclose that information on their websites.

Compiling the information required under the rule will force companies to make extensive inquiries on the origin of minerals contained in their products from suppliers all the way up the supply chain.

The National Association of Manufacturers (NAM), and other industry groups, challenged the rule in a federal court on several administrative grounds, including the failure of the SEC to consider less burdensome alternatives, as well as on the basis that the public disclosure of information violated companies' rights under the first amendment to the US Constitution. On July 23, the court rejected those claims.

In finding for the SEC, the district court rejected NAM's argument that the SEC failed to weigh the costs and benefits of the rule. The SEC was directed by Congress to issue the rule, the court noted, and the SEC was not in a position to second guess the congressional determination that the rule would promote Congress' intended humanitarian benefits.

NAM had also complained that the public disclosure requirement compels “burdensome and stigmatizing” speech in violation of the first amendment. NAM didn't contest the government's interest in promoting peace and security in the DRC and the court deferred to Congress that the required disclosures advance those goals.

The court also found that publishing disclosures on corporate websites represented a reasonable means to achieve Congress's objective of promoting peace and security in the DRC. The rule requires companies to publish reports that are filed with the SEC but doesn't require companies to separately publish a list of products that have not been found to be DRC conflict free. “Nor must companies physically label their products as such on the packaging itself,” the court noted.

NAM will surely appeal the ruling, but it's highly unlikely an appeals court will decide the case before the May 31, 2014 deadline for filing the first conflict minerals report with the SEC. In other words, companies that are behind the eight ball are stuck with the rule as it now stands, so they'd better start focusing their efforts on compliance.

14 comments on “Court Upholds Conflict Minerals Rule

  1. SP
    August 21, 2013

    Although many companies senior management has a will that their products and raw materials get compliant but its not an easy job to do. Getting compliant information from all the component manufacturer in BOM is quite a challenge.

  2. RyanL
    August 21, 2013

    At nearly the end of the supply chain as a Contract Manufacturer, we've been compiling what statements are available from our distributers and manufacturers we use. There is a lot of gray area still, vague statements, some that simply say “we're complying”. Which isn't exactly how you want to proceed should someone ask for the information from you. Still we are doing our due diligence in seeking answers higher up the supply chain. Hopefully that will be enough for the SEC or our end customers, whomever asks for the information from us first.

  3. elctrnx_lyf
    August 22, 2013

    This is going to take a lot of effort from the companies to actually find the right source of the conflit materials used in their components. Also the cost of the components could go up in the future if they really have to make sure all the purchases are adhered to the conflict minerals rule.

  4. Hailey Lynne McKeefry
    August 22, 2013

    Organizations need to create a supplier policy and extend their expectations to the supplies that they deal with. We'll be talking more about that so stay tuned.

  5. Hailey Lynne McKeefry
    August 22, 2013

    @RyanL, if you ruled the world, what would you want to get from your distributors? Do you think this vagueness is a necessary evil or is there a way to address it?

  6. Hailey Lynne McKeefry
    August 22, 2013

    anti-counterfeiting, conflict minersals…it seems as if everything has the potential to make component costs going up. AT some point, these things become the cost of doing business, don't they? Once compliance is generally achieved, the cost of it should go down.

  7. itguyphil
    August 22, 2013

    The cost will definitely rise when all  components are legitimate.

  8. ahdand
    August 23, 2013

    @Pcharles: Yes cost will be something which will decide the fate of it. Its sad to let such a thing which shows promising aspects to be decided on cost but right now there is no other alternative.       

  9. R.J.Matthews
    August 23, 2013

    The reality is the conflict mineral issue is not going to go away and there are likely to be tougher and more far reaching regulations than Dodd Frank on the way.

    NAM has just lost the plot trying to drag things out in the courts rather than actually wise up and deal with it.

    The lawyers must be happy though.

    August 23, 2013

    It does not surprise me many companies are behind in starting this activity but I do hope they get started on this important issue of compliance.

  11. itguyphil
    August 24, 2013

    “Its sad to let such a thing which shows promising aspects to be decided on cost…”

    Isn't that the case with everything???

  12. Hailey Lynne McKeefry
    August 26, 2013

    I think awareness is pretty high and now organizations are tyring to identify the best and most pratical path forward. It may happen sooner than we think.

  13. RyanL
    August 27, 2013

    I would love to have them issue a statement that says “here is my supply chain” linked all the way back to a mining corporation that states with no evidence to the contrary that they do not support any guerilla war efforts in the region. I highly doubt that level of transparency will happen, and I'm sure part of that will be due to people not wanting their competitors to know where they source their materials. There is something to be said about that too, companies need to be able to keep their sources out of the lime light sometimes in order to maintain that cost effective edge. It's a big mess, and honestly I'm not sure it will help the situation. We obviously do not want to be directly funding organizations that perpetrate terroristic acts upon civilian populations. However, how does one gurantee that a statement is in fact true? Are auditors going to start in the DRC with the mining corporations making sure that they track every penny. Something tells me we'll find some auditors missing under mysterious circumstances. I think for now the vagueness will be a necessary evil until the SEC clarifies exactly what level of reporting they will except. And once they do, expect it to only be as clear as spelled out.


    AT some point, these things become the cost of doing business, don't they? Tell that to my customers! Every little price increase is a gripe, and more often then not people keep pressing for a price reduction. I'm not saying that it's right, but it's a tough place out there right now. It makes people want to shop around, and a lot of times these days that leads to overseas for production needs. And that will be a very interesting thing for the SEC to try to regulate.

  14. Hailey Lynne McKeefry
    August 28, 2013

    @RyanL, it's a nice dream you have for this…and one that would be lovely to realize. I agree that its probably a long shot,but perhaps we can find a better balance between complete visiblity and now visiblity. Stay tuned…i recently talked to guy about this and he gave me some great tips which i will share.

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