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SEC's Conflict Mineral Rule Lays Minefield of Uncertainty

Melissa Klein Aguilar | January 11, 2011

Supply chain transparency will be a hot topic in 2011, thanks to a controversial Securities and Exchange Commission proposal aimed at curbing violence in the war-torn African Congo.

The Dodd-Frank Act directs the SEC to write rules requiring companies to disclose whether their products use or contain conflict minerals originating in the Democratic Republic of the Congo or an adjoining country. Under a proposal out for comment until Jan. 31, a wide range of issuers would have to disclose annually whether they use certain minerals “necessary to the functionality or production” of a product that they manufacture or contract to be manufactured that originate from the DRC.

The minerals are gold; cassiterite, the metal ore used to produce tin; columbite-tantalite, the ore tantalum is extracted from; and wolframite, an ore used to produce tungsten. The metals are used in all sorts of products, including jewelry, computers, cell phones, video games, digital cameras and jet engines.

Roughly 6,000 companies will be affected by the proposal, according to the SEC. About 1,200 of them will have to furnish an audited conflict minerals report—and considering how poor, dangerous, and disorganized central Africa still is, businesses are already raising alarms that investigating their suppliers in that part of the world will be nearly impossible.

“Given the existing infrastructure, to do the kind of country-of-origin inquiry or due diligence that SEC rule would require right now is extremely difficult,” says Catherine Robinson, director of high tech trade policy for the National Association of Manufacturers.

Worse, the statute doesn't have a de minimis standard, so even trace elements of tin, tungsten, or gold contained in or used to manufacture a product could trigger a disclosure obligation, says Cathy Dixon, a partner in the law firm Weil Gotshal & Manges.   

“Driving that transparency back up through supply chain is a major challenge,” says Rick Goss, vice president of environment and sustainability for the Information Technology Industry Council.

Robinson explains that the Congo and its surrounding neighbors—who have been fighting for the better part of 20 years, with loss of life in the millions—have no programs to let companies trace where their materials come from, or to assure that those metals are conflict-free.

Of course, most companies don't obtain minerals from the DRC directly. But they do often use suppliers and distributors who purchase them from smelters or refiners who melt them down and combine them with ore from all over the world; the minerals routinely pass through several intermediaries between the mines and the finished product.

Are some of those intermediaries African warlords using the proceeds to fund the war? Right now, nobody can be sure.

“If the rule goes forward, the majority of companies would be unable to determine the origin of the metals with any level of accuracy.”

—Catherine Robinson,
Director of High Tech Trade Policy,
National Association of Manufacturers

Under the SEC's proposal, issuers would have to conduct a “reasonable country-of-origin inquiry” to determine whether their conflict minerals originated in the Congo region. If none did, they would have to disclose that conclusion along with the process they used in making that determination in their annual report.

One major concern will be how much assurance companies will need to obtain to say whether their minerals are conflict-free, says David Martin, a partner in the law firm Covington & Burling who works with the IT Industry Council. “It may be a pretty easy concept for a company that owns a mine in the Congo,” he says. “It's quite another story for a cell phone manufacturer obtaining necessary metals from smelters outside [the United States] with little understanding about where the smelter is obtaining its raw materials.”

Meanwhile, issuers that do say their minerals might be tainted by conflict, or those that can't definitively say the minerals did not, would have to disclose that conclusion and submit an independently audited Conflict Minerals Report. Observers say many companies would fall into that category because they can't prove the negative with enough certainty.


The following information from the SEC details the requirements for the new conflict minerals rules:

Application of the Rules

The proposed rules would apply to an issuer if:

  • The issuer files reports with the Commission under the Exchange Act.
  • Conflict minerals (generally tantalum, tin, gold, or tungsten) are “necessary to the functionality or production” of a product manufactured or contracted to be manufactured by the issuer.

An issuer would be considered to be “contracting to manufacture” a product if:

  • It has any influence over the product's manufacturing.
  • If it offers a generic product under its own brand name or a separate brand name, regardless of whether the issuer has any influence over the manufacturing specifications of the product, provided the issuer has contracted to have the product manufactured specifically for itself.

The requirements would apply equally to domestic and foreign issuers and to smaller reporting companies.

Determining Whether Conflict Minerals Originated in DRC Countries and Resulting Disclosure

Under the proposed rules, the reporting issuer would be required to disclose in its annual reports whether its conflict minerals originated in the DRC countries. This disclosure would be based on a reasonable country of origin inquiry.

If an issuer concludes that its conflict minerals did not originate in the DRC countries, the issuer would disclose this determination and the reasonable country of origin inquiry process it used in reaching this determination.

The issuer also would be required to:

  • Make the disclosure regarding this determination available on its Internet website.
  • Provide the Internet address of that site.
  • Maintain records demonstrating that its conflict minerals did not originate in the DRC countries.
    If the issuer concludes that its conflict minerals did originate in the DRC countries, or is unable to conclude that its conflict minerals did not originate in the DRC countries, the issuer would:
  • Disclose this conclusion.
  • Note that the Conflict Minerals Report is furnished as an exhibit to the annual report.
  • Furnish the Conflict Minerals Report.
  • Make available the Conflict Minerals Report on its Internet website.
  • Disclose that the Conflict Minerals Report is posted on its Internet website.
  • Provide the Internet address of that site.

Conflict Minerals Report

Under the proposed rule, the Conflict Minerals Report would include a description of the measures the issuer had taken to exercise due diligence on the source and chain of custody of its conflict minerals, including a certified independent private sector audit of the Conflict Minerals Report that identifies the auditor and is furnished as part of the Conflict Minerals Report.

Further, the issuer would be required to include in the Conflict Minerals Report:

  • A description of its products manufactured or contracted to be manufactured containing conflict minerals that are not “DRC conflict free” as defined in the rules
  • The facilities used to process those conflict minerals.
  • Those conflict minerals' country of origin. 
  • The efforts to determine the mine or location of origin with the greatest possible specificity.

Issuers would be required to disclose the due diligence they used in making their determinations, such as whether they used any nationally or internationally recognized standards or guidance for due diligence.


Securities and Exchange Commission (Dec. 15, 2010).

“If the rule goes forward, the majority of companies would be unable to determine the origin of the metals with any level of accuracy,” Robinson says. That could give rise to companies ceasing to use any minerals at all from the Congo region, Goss and others say, and hurt efforts to stabilize the region—which would contradict the whole purpose of the SEC rule in the first place.

Escaping the Squeeze

Several efforts in the private sector are underway to address the problem. The tin industry has launched a “bag and tag” program, where minerals are sealed immediately at a “clean” mine. That, in conjunction with a smelter validation program led by the Electronics Industry Citizenship Coalition and the Global eSustainability Initiative, could allow companies to verify that their ore didn't come from conflict mines. If fully implemented, Goss says, those programs should let companies satisfy the reasonable inquiry standard to say their products are conflict free.

The bad news: A ban on mining is currently in place in the DRC. As long as that lasts, nobody knows when verification programs will be implemented or how well they'll work.

That makes timing of the SEC rule critical. Final language is due by April 15. Compliance will start in a company's first full fiscal year following the rule's adoption. So if the rules are adopted in April 2011, calendar year-end companies would need to start compliance in 2012 and provide all the proper disclosures in their annual reports published in the spring of 2013.

In the tech industry, it takes about nine months from when raw ore is mined until it ends up in finished product, Goss says. Most companies would need to be able to verify their sourcing by April—as in this April, three months away—to determine whether they are conflict-free for their 2012 annual reports.

The SEC proposal release acknowledges that conducting the inquiry to determine the origin of conflict minerals could be a significant burden. Even if companies don't have to file a conflict minerals report, collecting that information could cost Corporate America more than $71 million in total, the release estimates.

Retailers and others that contract with third parties for the manufacture of products on store shelves (particularly anyone who sells gold jewelry) might be most challenged with the due diligence, Dixon says. Depending on the particular product and industry, compliance costs might ultimately be passed on to customers, she says.

The Conflict Minerals report, which would include a description of the measures taken to exercise due diligence on the source and chain of custody of its conflict minerals, would be furnished as an exhibit to the annual report and posted on the company's Website.

The proposal doesn't provide guidance on what constitutes a “reasonable country-of-origin inquiry” and doesn't propose a specific standard for due diligence; the SEC says that gives issuers flexibility to tailor those tasks to their specific circumstances. The release seeks comment on dozens of questions on how to implement the rule, including whether the reporting standards should apply equally to all conflict minerals, and whether smaller companies or foreign private issuers ought to be exempt from the requirement or subject to limited disclosure.

Dixon says companies covered by the proposal should review guidance on conducting supply chain due diligence issued by the Organization for Economic Cooperation & Development and by the United Nations. The State Department must provide a plan to Congress this month outlining how it will provide guidance to commercial entities on conducting the necessary due diligence, which she says should also be helpful.