by David J. Levine, McDermott Will & Emery LLP
It has been nearly two years since the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted. Yet, interested parties continue to anxiously await implementation of the Act’s “Conflict Minerals” law. That provision, section 1502 of the Act, imposes new reporting requirements on public companies that use “conflict minerals”—gold, columbite-tantalite, cassiterite, wolframite and derivatives of the latter three (tungsten, tantalum, and tin or “3T+G”)—in their products, which include everything from cell phones to tin cans.
The purpose of the law, universally supported, is to eliminate critical funding derived from those minerals by militias that for several years have devastated the Democratic Republic of Congo and the surrounding region in central Africa. As with other provisions of Dodd-Frank, Congress assigned implementing responsibility for section 1502 to the US Securities and Exchange Commission. Despite issuance by the SEC in September 2010 of detailed proposed regulations implementing the Conflict Minerals law, congressional and SEC self-imposed deadlines for issuing final rules have come and gone with no final rules issued to date. The SEC rule-making calendar indicates the agency will issue final rules by the end of June and SEC Chairman, Mary Schapiro, recently indicated it may happen sooner. Yet, all interested parties continue to await needed direction from the SEC on the regulatory implementation of this unique law.
Through section 1502, Congress sought to bring transparency to, and thereby to curtail, illicit conflict minerals trade by requiring companies to report on their use. In its proposed regulations, the SEC hewed closely to the legislative language, requiring companies who use any of the 3T+G in their products to file an audited “Conflict Minerals Report” with the SEC each year to demonstrate that no conflict minerals they used were from sources that benefited the militias in the DRC region. The delay by the SEC in issuing its final rules results from an inherent tension between its obligation to implement the law faithfully and its reluctance to bind companies with infeasible or even impossible auditing and reporting requirements.
A key concern of companies subject to the law is the difficulty of tracking the origin of any conflict minerals used in their products. The Act requires issuers to publish and file a report with the SEC if conflict minerals are necessary to the functionality or production of a product they manufacture or have manufactured. This requires issuers and, as a practical matter, their suppliers to conduct a country of origin review for any conflict minerals used in their products. This will require more than the standard type of country of origin inquiry companies routinely undertake for customs purposes and, instead, may call for a rigorous supply chain investigation.
Details on these requirements await issuance of the final rules and, accordingly, interested parties remain uncertain about key elements, including precisely what companies are covered, whether exceptions apply, whether the requirements will be phased in over time, how audits should be conducted, what the expected costs will be for complying, how violations of the rules will be established, and what penalties will apply for violations.
Reports indicate the law has disrupted a widespread black market for conflict minerals, and some mining operations in the region have sought to demonstrate they are “conflict-free.” Some US companies, meanwhile, have already begun to put tracking and other compliance measures in place. All are watching and waiting for the SEC rulemaking process to conclude. Stay tuned . . .
David J. Levine is a partner in the International Trade Practice of the law firm McDermott Will & Emery LLP. He may be contacted at DLevine@mwe.com, 202-756-8153.
Topic tags: board of directors, conflict minerals, corporate governance, Dodd-Frank Wall Street Reform and Consumer Protection Act