Ahead of a scheduled August SEC open meeting to consider regulations implementing the conflict minerals disclosure provisions of the Dodd-Frank Act, the US Chamber of Commerce asked the SEC re-propose the regulations and reopen the comment period to address unresolved important questions. Adoption of final regulations without resolving these fundamental deficiencies would, said the Chamber’s letter, result in a flawed rule with a substantial adverse impact on small businesses and capital formation. The Chamber also urged the SEC to include a safe harbor and de minimus standards in the final regulations.
Section 1502 of Dodd-Frank requires the SEC to issue a conflict minerals disclosure rule requiring companies to disclose whether necessary conflict minerals used in their products originated in designated conflict areas and, if they did, to provide an additional report with certain disclosures. On July 2, 2012, the SEC announced that it will hold an open meeting on August 22, 2012 to consider whether to adopt a final conflict minerals disclosure rule.
According to the Chamber, the SEC’s estimate of how many companies would be impacted by the conflict minerals regulations only reflects the tip of the iceberg and is therefore fundamentally deficient. The SEC estimated that the proposed conflict minerals rules would impact between 1,199 and 5,551 companies. The Chamber noted that this estimate is limited to those public companies directly subject to the proposed regulations.
However the impact and cost would extend far beyond reporting companies. As proposed, the regulations will impose significant costs on vendors and suppliers to public companies. The Chamber noted that an individual manufacturing company may have as many as 60,000 or 100,000 separate vendors, including small private businesses. The SEC estimate fails to reflect the costs to private companies that serve as suppliers and vendors to reporting companies.
Further, a rule adopted through a flawed process that does not comply with the requirements of the Regulatory Flexibility Act and the Small Business Regulatory Enforcement and Fairness Act is unlikely to withstand judicial scrutiny. Compliance with the Regulatory Flexibility Act requires more than an estimation of the costs of the regulations on small businesses, not merely those public companies that will have a public disclosure reporting obligation. The proposal in its present form may have a direct negative impact on the ability of smaller private companies to compete for business. In some cases, smaller companies that are unable to absorb the potentially substantial costs of building an internal tracking mechanism may lose business to larger competitors.
Because of the supply chain complexities, as well as the scientific and metallurgical issues involved, the Chamber stated that this analysis was not realistic and that the SEC should disclose its rationale for this estimate, provide a new cost-benefit analysis and withdraw the proposed rule.
Separately, the Chamber observed that the challenges inherent in tracking a mineral supply chain primarily arise upstream from the company’s operations and are often outside of a company’s control. Thus, the Chamber urged the SEC to include a safe harbor in the final regulations enabling companies distant in the supply chain that have little or no view of, or control over, the acquisition of conflict minerals to comply by adopting defined contractual procurement practices, without also being subject to undue and impractical audit or reporting requirements. Moreover, the inclusion of a de minimus standard in the final regulations would avoid the triggering of meaningless disclosure requirements even if only trace amounts of a mineral or derivatives are used in a product.