October 11, 2013
Background Paper on Conflict Minerals Disclosure Rule
Related Studies & Resources
October 11, 2013
Section 1502 of the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (Dodd-Frank Act) directs the U.S. Securities and Exchange Commission (SEC) to promulgate regulations regarding the use of conflict minerals from the Democratic Republic of Congo (DRC) and adjoining countries. Under the statutory language, companies with conflict minerals that are necessary to the functionality or production of a good manufactured by that company must disclose annually whether any of those minerals originated in the DRC or an adjoining country. If a company’s conflict minerals originated in any of these countries, the company is required to submit a report to the SEC that includes a description of the measures it took to exercise due diligence on the conflict minerals’ source and chain of custody. The measures must include an independent private sector audit of the report, with a certification of the audit. In August 2012, the SEC finalized rules to implement this statutory provision.
Potential Impact of Regulation
The SEC’s final rules are not cost-effective. By refusing to create a de minimis exception, requiring an onerous “reasonable country of origin inquiry,” expanding the rules’ scope to non-manufacturers, and providing for an irrational transition period, the SEC greatly multiplied the unprecedented burden these rules impose on companies, with no demonstrable benefit to the Congolese people. As finalized, companies will have to spend enormous sums to generate reports that will not provide any meaningful information. The SEC estimates that the final rules will have an initial compliance cost of $3-4 billion, with ongoing annual compliance costs of $200-600 million.
The Business Roundtable (BRT), the National Association of Manufacturers (NAM), and the U.S. Chamber of Commerce (Chamber) have challenged the SEC’s conflict minerals rules in the U. S. District Court for the District of Columbia claiming that (1) the Commission failed to meet its statutory obligation to consider the effects of its rules, (2) the Commission rejected alternatives that would have significantly reduced the costs of the rules, and (3) the statutory provision itself compels speech in violation of the First Amendment. On July 23, 2013, the District Court issued an adverse decision upholding the rule. The BRT, NAM, and Chamber have appealed the decision to the U.S. Court of Appeals for the District for Columbia, and oral argument is expected this winter.