Business Groups Challenge SEC Conflict Minerals Regulation in DC Circuit

A consortium of corporate and business groups has asked the DC Circuit to review the SEC regulation implementing the conflict minerals disclosure provisions of the Dodd-Frank Act. In a petition filed with the federal appeals court, the US Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers asked that the DC Circuit modify or set aside the regulation in whole or in part. The vote to adopt the regulations was 3-2, with Commissioners Paredes and Gallagher dissenting. While the business community understands the need to end the strife in the Democratic Republic of Congo, the SEC regulation is not an effective approach. Rather, the final conflict minerals regulation imposes an unworkable and overly broad and burdensome system that will undermine jobs and may not achieve the overall congressional objective. (National Association of Manufacturers, et al. v. SEC, CA DofC, No. 12-1422, Oct. 22, 2012).

Section 1502 directs the Commission to issue rules requiring companies to disclose their use of conflict minerals if those minerals are necessary to the functionality or production of a product manufactured by those companies. Under the Act, those minerals include tantalum, tin, gold or tungsten. In their petition, the business groups also asked the DC Circuit to review Section 1502.

The SEC rule would apply to a company that uses any of the four designated minerals if the company files reports with the SEC under the Exchange Act and the minerals are necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company. 

A company would be considered to be contracting to manufacture a product if it has some actual influence over the manufacturing of that product.  This determination would be based on the facts and circumstances, taking into account the degree of influence the company exercises over the product’s manufacturing.  A company would not be deemed to have influence over the manufacturing if it merely affixes its brand or logo to a generic product manufactured by a third party, services, maintains, or repairs a product manufactured by a third party, or specifies or negotiates contractual terms with a manufacturer that do not directly relate to the manufacturing of the product.

Under the final rule, a company that uses any of the designated minerals would be required to conduct a reasonable good faith country of origin inquiry reasonably designed to determine whether any of its minerals originated in the covered countries or are from scrap or recycled sources.  If the inquiry determines that the company knows that the minerals did not originate in the covered countries or are from scrap or recycled sources or the company has no reason to believe that the minerals may have originated in the covered countries and may not be from scrap or recycled sources, then the company must disclose its determination, provide a brief description of the inquiry it undertook and the results of the inquiry on new Form SD filed with the Commission.

The company also would be required to make its description publicly available on its Internet website and provide the Internet address of that site in the Form SD.

Under the final regulation, companies that are required to file a Conflict Minerals Report would have to exercise due diligence on the source and chain of custody of their conflict minerals.  The due diligence measures must conform to a nationally or internationally recognized due diligence framework, such as the due diligence guidance approved by the Organization for Economic Co-operation and Development (OECD).

If a company determines that its products are DRC conflict free, that is the minerals may originate from the covered countries but did not finance or benefit armed groups, then the company would have to obtain an independent private sector audit of its Conflict Minerals Report, certify that it obtained such an audit, include the audit report as part of the Conflict Minerals Report, and identify the auditor. 

The independent audit would verify that the company’s due diligence was conducted in conformity with an internationally recognized due diligence guideline, which essentially means the OECD Due Diligence Guidance, which the staff noted is the only internationally recognized due diligence guideline.

The OECD Due Diligence Guidance for responsible supply chains of conflict minerals is a five-step due diligence regime for use by any company potentially sourcing minerals or metals from conflict-affected areas. Broadly, the guidance recognizes that, while specific due diligence requirements will differ depending on the mineral and the position of the company in the supply chain, companies should review their choice of suppliers and sourcing decisions and integrate into their management systems a five-step framework for risk-based diligence for responsible supply chains of minerals from conflict areas.