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Wednesday, April 4, 2012

The Securities and Exchange Conflict Minerals Rulemaking, an Impossible Balancing Act?

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 The Dodd–Frank Act’s Section 1502 requires the Securities and Exchange Commission, in consultation with the U.S. Department of State, to propose regulations by April 2011 for companies which use “conflict minerals” from the Democratic Republic of Congo and adjoining countries, i.e. Tantalum (used in cellphones and iPods), tin, gold or tungsten.

The SEC issued the draft rules in December 2010. The proposal required companies using minerals from these regions which “are necessary to the functionality or production” of a product they manufacture, to draft and submit a further Conflict Minerals Report including “an independent private sector audit of its supply chain, as an exhibit to its annual report and on its website.”

Needless to say, the furor resulting from these draft rules has resulted in further and continuing delay as the SEC attempts to consider all the voices clamoring to be heard, ranging from Secretary of State Hilary Clinton, to international human rights groups, to jewelry and electronics industries.
Secretary of State Hilary Clinton, Feb. 28, urged the SEC to “go as far as possible” in making a strong regulation. A key player in the Organization for Economic Co-operation and Development (OECD) she spoke at the adoption of Due Diligence Guidelines for Responsible Supply Chains ceremony May 25, 2011, in Paris. The OECD guidance includes detailed recommendations for companies to carry out an independent third-party audit of supply chain due diligence at identified points in the chain.

Democratic lawmakers and key drafters of the conflict minerals provision,-- Sen. Richard Durbin (D. Ill) and Rep. Jim McDermott (D-Wash)-- have called on companies to do the “right but tough thing” by using this global method of social compliance. In a letter Feb 15, 2012, they complained that the delay by the SEC has slowed the establishment of transparent supply chains, allowed smuggling to take hold and has caused unnecessary hardship to the people of Central Africa.

However, some Republican lawmakers are urging the SEC to write a final rule that would require only disclosures for “material projects ” and allow exemptions for certain companies, pointing out that when metals are recycled very often, as gold often is, this creates tremendous cost, making impossible the tracing of the supply chain. The National Association of manufacturers has estimated the plan could cost the industry $9-$16 billion to implement.

The Small Business Administration’s Office sent a letter to the SEC Oct. 25, 2011, suggesting that, because of their excessive costs, the rules risk violating the Regulatory Flexibility Act. Bolstering their argument is the fact that July 22, 2011, the D.C. Circuit vacated the SEC’s new proxy access rule, in Business Roundtable v. SEC, saying the agency failed to adequately assess the regulations’ economic impact.

Critics have argued the impossibility of knowing whether someone in a long supply chain is contributing directly or indirectly to illegal armed groups. Some have accused the Dodd-Frank provision of merely demonizing minerals, resulting in a de facto embargo, causing huge collateral damage to all the legitimate mining regions which are not involved in armed conflict, rape or child labor. In further support, critics note that Apple Inc. and Hewlett- Packard have stopped sourcing from the region for fear of violating the pending rule.

Pressed for a date certain, SEC Chairman Mary Schapiro’s latest estimate is that the rule may emerge in the middle of the year as she noted “how complex and out of the ordinary for the SEC” this rulemaking is for the commission.

Laura Tieger Salisbury
Legal Editor, Tax Management
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