The SEC Establishes New Rules Regarding “Conflict Minerals” in the Manufacturing Process

September 4, 2012

Tuesday, September 4, 2012, by Kelly Anderson
Just over a week ago, the Securities and Exchange Commission approved new rules that could considerably impact the manufacturing process of numerous American electronic companies.  Enacted “under the umbrella” of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the new SEC regulations require companies to publicly disclose whether their products contain “conflict minerals,” including tantalum, tin, gold, or tungsten, that originated in the Democratic Republic of the Congo (DRC) or any adjoining countries.
 A primary justification for the Act is that the exploitation and trafficking of these conflict minerals by armed groups has been fostering regional conflicts in Central Africa for many years, playing an integral part in the current “emergency humanitarian crisis” affecting the region.  In recent years, activists around the globe have been lobbying for restrictions on these conflict minerals, primarily used in the United States for manufacturing of consumer electronic devices.
This new rule, applying to all U.S. companies for which these minerals are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the company, requires that the company file annual reports with the SEC under the Securities Exchange Act.  Under this rule, a company is required to carry out a reasonable ‘country of origin’ examination, executed in good faith and designed to identify whether or not the minerals used in its products originated in the DRC or its neighboring countries.
Despite the fact that the rules are required by the SEC under the Dodd-Frank Act, a potential obstacle regarding enforcement of this new rule is that the SEC lacks sufficient authority to take punitive action towards companies that still purchase these select minerals from DRC sources.  Nevertheless, many technology companies, including Apple, HP, Intel, and Motorola Solutions, have voluntarily amended their policies, building conflict-free programs and demonstrating to the rest of the industry that “clean supply chains” can be achieved while still maintaining profits.  In fact, social enterprise organizations are gaining popularity, based on beliefs that the market is an increasingly efficient way to promote the public good and people will pay more for goods and services that have positive effects on the world around them.
Although some companies have already taken steps toward reforming their product manufacturing process to exclude conflict minerals or obtain these minerals from scrap or recycled sources, other companies that have not yet made this transition may find significant challenges in conforming to this new rule.

“They may have a lot of information about their supply chain, but they may never have really looked in the past to see whether any of their products use conflict minerals . . . And if you have a lot of products, with a lot of components and a lot of suppliers, that may be a big job.” –Michael Littenberg, a partner at Schulte Roth & Zabel

The SEC estimates that this new rule may affect over 6,000 public companies, resulting in billions of dollars in aggregate compliance costs.   Indeed, the Chamber of Commerce is threatening a lawsuit against SEC, alleging that companies will not be able to comply with this rule on account of the high cost of supply-chain clean up.
In a world of limited resources that is becoming increasingly dependent on technology, it is not difficult to see shifting of priorities manifested in government regulations.  Investigation into mineral origin is now not only an occasional demand by the concerned technology consumer, but a legal requirement.