SEC approves rules on ‘conflict minerals’

Companies will be required to disclose if they rely on minerals from war-stricken parts of Africa under new rules adopted Wednesday by the Securities and Exchange Commission (SEC).

The SEC finalized a contentious piece of the Dodd-Frank financial reform law aimed at cracking down on the use of “conflict minerals” from the militia-ravaged Democratic Republic of the Congo (DRC).

By a 3-2 vote, the agency’s commissioners agreed to adopt the rules, bringing to a close a long-running fight that has attracted scrutiny from some of the world’s largest companies and intense pushback from the business community. 

The SEC’s two Republican commissioners — Daniel Gallagher and Troy Paredes — dissented from the rule, warning of possible unintended consequences and a “de facto embargo” against the entire nation, including innocent bystanders.

The provision was a late entry into the Dodd-Frank law. Democrats said the provision would help combat human-rights abuses in the DRC by making companies more accountable for buying minerals that help fund the country’s militias.

Under the rules, companies that rely on four minerals — tantalum, tin, gold and tungsten — to manufacture their products would have to conduct a “reasonable” inquiry to determine where the minerals originated. If a company determines its minerals did not emerge from the DRC, it would have to detail those findings to the SEC and publicly disclose it on its website. Similarly, if it knows the minerals it used came from scrap or recycled sources, it would disclose that finding and could qualify its products as “DRC conflict free.”

Companies that have reason to believe their minerals might have come from the DRC or are not recycled or scrap would have to research the source of the minerals, and file a new Conflict Minerals Report with the SEC, which would also be made public.

If at the close of that inquiry, a company determined its mineral purchases did not benefit the armed groups, it would have to obtain an independent private audit of the report to validate the findings, which would also have to be sent along to the SEC.

If a company cannot state its minerals are conflict-free, it would have to detail in the report which products rely on the minerals, what facilities process them, where the minerals came from and what efforts the company took to determine their original location.

The SEC will not have the power to punish companies that purchase minerals in the DRC, however.

In a nod to industry concerns, the SEC modified the final version of the rules from its January 2010 proposal to give companies a two-year grace period. During that stretch, companies that are unable to determine the source of their minerals would be permitted to describe the minerals as of “undeterminable” origin. Smaller companies would have four years to use that designation.

The final rules come more than a year after they were supposed to be completed, as Dodd-Frank stipulated they be finalized by April 17. 

In an editorial published on The Hill’s website before the rules were finalized, Thomas Quaadman with the U.S. Chamber of Commerce was harshly critical of the SEC’s efforts. He agreed that the overall goal of the provision is “noble” and worthy of Congress’s attention, but called the agency’s rules unrealistic and “unworkable.”

“Businesses can’t grow or raise capital in a tangle of well-intended but misguided regulations. Congress was wrong to make the SEC a new vehicle to project foreign, social policy,” he wrote. “Instead of compounding the problem, we believe the SEC must follow the letter of the law by first conducting a true cost benefit analysis of these rules before they vote on them.”