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The Conflict Minerals Rule: Unintended Consequences

Opponents of the SEC's conflict metals rule are citing the opinions of regional experts who say that the SEC rules do not advance Dodd-Frank Section 1502's objective of weakening armed groups in the Democratic Republic of the Congo and have caused a de facto embargo of Congolese minerals.

Section 1502 was meant to address unrest in the DRC — and the notion that trade in “conflict minerals” is financing that violence — by mandating disclosure by public companies of their use of certain minerals sourced from the region.

But a group of regional experts, including former US government officials, filed a friend of the court brief in a US appeals court in a case brought by the National Association of Manufacturers to invalidate the conflict minerals rule saying the SEC didn't do its job when it considered what sort of rule to adopt to further the aims of Section 1502.

According to the brief:

Not only did the SEC fail to analyze the rule’s benefits, the SEC made discretionary choices that many comments established will cause further economic harm to the Congolese, aggravate instability, and increase the influence of armed groups in the DRC.

Among the grievances cited by the amici curiae , the SEC rule’s due diligence requirements make it prohibitively expensive for companies to ascertain whether their minerals originated in the region and whether they indirectly or directly benefited armed groups. The SEC also extended those requirements to a wider range of companies than Section 1502 contemplated.

The brief continues:

The SEC justified those costs by saying that they were warranted to advance Section 1502's humanitarian objectives. But the SEC acknowledged that the higher these compliance costs are, the greater the incentive for issuers to avoid triggering these due diligence obligations altogether — by abandoning sourcing from the DRC and its neighbors entirely. Avoiding a permanent de facto embargo should have been among the SEC’s highest priorities.

Embargo effect
This position is supported by the findings of a United Nations report on the region that found that resistance of companies and industry groups towards the SEC rules has led traders to stop purchasing Congolese minerals altogether. A further effect has been that air transportation services used to fly minerals out of remote areas have stopped flying food and other supplies in. Far from reducing violence in the region, the rule has instead led to increased armed conflict.

According to this comment filed with the SEC by a group purporting to represent Congolese miners, the Electronic Industry Citizenship Coalition (EICC) made a decision in 2011 to stop sourcing from the DRC. The letter also details increased unemployment and the devastating impact this has had on miners and their families.

Ironically, the UN report also found that the control of some armed groups over certain natural resources has actually been reduced.

By now, all of the briefs in the litigation surrounding the legitimacy of the conflict minerals rule have been submitted. Oral argument before the US Court of Appeals for the District of Columbia Circuit is scheduled for May 15.

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