Dodd-Frank Section 1502 – Conflict Minerals: Still a great deal of work!
A quick glance at the corporate world ABCs and you will find that most often than not, C stands for Compliance. And Compliant is what you strive to be as a company. However, in our pursuit of compliance, we may tend to overlook the other C that also stands for Conflict. It has become inconceivable since last two years to think that Compliance can be achieved without paying adequate attention to Conflict minerals requirements, more so when the month of June approaches. It’s also noteworthy that companies do not seem to have gathered much experience or clarity although it’s a second year of filing.
The US Dodd-Frank Wall Street Reform and Consumer Protection Act (Sec 1502) adopted an amendment in the form of Sec 13(p) of the Securities Exchange Act of 1934 which provides for the annual reporting of products containing Conflict Minerals to the Securities Exchange Commission [SEC]. The minerals notified as Conflict Minerals by the SEC are 3TG (Tin, Tantalum, Tungsten and Gold) minerals which originate in the Democratic Republic of Congo and the adjoining countries (Covered Countries). The provision applies to manufacturers as well as the issuers who “contract to manufacture”. The disclosure is mandatory only for the products for the functionality or production of which the use of Conflict Minerals is necessary. The Regulations issued by the SEC with respect to the Conflict Minerals discusses this new disclosure requirement in detail and gives us the Final Rule.
While we all understand the intention of the Congress to inhibit the ability of armed groups in the Covered Countries to fund their activities by exploiting trade in Conflict Minerals, we must also appreciate the use of securities laws disclosure requirements chosen by the Congress to create greater public awareness towards the source of the issuer’s Conflict Minerals and to promote the exercise of due diligence on the Conflict Mineral supply chain. However, such an amendment is anticipated to be one of the biggest challenges in making the company compliant with this latest disclosure requirement. Given the enormous chain and wide spread of suppliers for each manufacturer, tracing the suppliers through all its tiers and reaching the origin of these minerals seems to be neither feasible nor practical for the issuers. Anticipating this at the stage of drafting, the SEC’s Final Rule relies on a reasonable design and good faith execution approach in tracing the origin of Conflict Minerals without stipulating any legal steps and measures for doing so. However, the attempt of the Commission to base the inquiry of the country of origin on reasonableness and good faith has not been of much help to the issuers, the reason being the chances of disapproval of the parameters of reasonable inquiry by the SEC at the time of filing the Conflict Mineral Report, when the issuer may be helpless and will not be able to do much about it. The SEC has not laid down any parameters of reasonableness except certain clauses such as ‘the issuer need not necessarily hear from all its suppliers as long as it does not ignore warning signs or other circumstances indicating ... originated in the Covered Countries’ without stipulating even a vague figure for this exemption. Upon being requested by commentators to at least formulate due diligence guidance for issuers, the SEC agreed but also recommended the issuers to take recourse to the OECD Guidelines which are more recognised internationally. The disclosure requirement for each issuer starts from identifying the products for the functionality and production of which 3TG is necessary, however, it does not stop at due diligence of the supply chain but goes on to include an independent private audit of the Conflict Mineral Report before filing it with the SEC. In addition to this complex set of requirements, the fact that the first Conflict Mineral Report was due to be filed with the SEC by May 31, 2014 took a toll on all the issuers.
Subsequently, in the year 2014, as a result of the decision given by the U.S. Court of Appeals for the District of Columbia Circuit in the legal action against SEC’s Final Rule, the SEC issued a statement wherein pending the further action, it struck off the IPSA, Independent private-sector audit requirement unless a company voluntarily describes a product as DRC conflict free. However, the challenge remains in determining the company conflict free although the transition period is provided by the SEC.
Thus, on the one hand, the amendment of the SEC Conflict Minerals disclosure requirement sheds some light on the humanitarian impact of industrialisation by reinforcing corporate governance of the SEC’s issuers whereas on the other hand, such amendments constitute a great deal of work to be done by the issuers in a relatively shorter frame of time. Having said this, the Rule is making companies more vigilant and aware of their supply chain and proves as a check on companies’ risk management capabilities.
(Please Note: This is only a research based article providing personal analysis concerning the given topic.)
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