The SEC’s conflict minerals rule: a mid-point status report  



After several delays and amid considerable controversy, the US Securities and Exchange Commission (SEC) adopted its final Conflict Minerals rule by a 3-2 vote on 22 August 2012. With the clock now ticking on a reporting period that began in January 2013, and the first SEC filings due 31 May 2014, it is a good time to take a look at how things are going with respect to compliance with this demanding new rule. 

What does the rule require?

In enacting section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress directed the SEC to promulgate a conflict minerals rule. The underlying idea was to create disincentives for businesses to use four common, high-value minerals sourced from countries in central Africa, because militants there have exploited this trade to finance a cycle of violence and human rights violations. By forcing publicly traded companies to report the presence in their manufactured goods of these conflict minerals – and their derivative metals, tin, tantalum, tungsten, and gold (known as the ‘3TGs’) – and to conduct costly diligence and, potentially, third-party audits if they use materials from suspect areas or could not prove the metal’s origins, Congress hoped to shut off funds to the warlords and thereby stop the violence. 

To carry out this objective, the SEC’s conflict minerals rule establishes a three-step process: 

First, a company subject to SEC reporting requirements (whether US- or foreign-based) must determine whether it manufactures or ‘contracts to manufacture’ products containing the 3TGs, and if so, whether these conflict minerals are necessary to the functionality or production of the product. In one of its most controversial aspects, the rule includes no de minimis exemption, so even trace quantities of these metals require a company to take additional action. 

Second, if a company manufactures or contracts to manufacture products that contain necessary conflict minerals, it must undertake a reasonable country of origin (COI) inquiry of its supply chain to ascertain whether any of the metals originated in the nine covered central African countries. Regardless of what the company learns about the provenance of its conflict minerals, it must prepare a disclosure statement explaining the basis for its determination and providing a brief explanation of the inquiry it conducted. The disclosure statement must be filed with the SEC as part of the new Form SD and displayed on the company’s website. 

Finally, should the company have reason to believe its conflict minerals originated in a covered country, it must institute more extensive diligence of its supply chain, and must attach a Conflict Minerals Report to its Form SD, which includes: (i) a discussion of its diligence efforts; (ii) a certified, independent private sector audit carried out in a manner consistent with nationally or internationally recognised audit criteria; and (iii) a description of the company’s products that “have not been found to be ‘DRC conflict free’”, that is, those that cannot be documented to have come from sources other than mines in the Democratic Republic of the Congo under the control of warlords, based on US State Department reports. 

The SEC was aware that no reliable infrastructure yet exists to support tracing the origins of these common materials all the way back to the mine, and the final rule allows for a two-year transition period (four years for small businesses), during which a company can classify its conflict minerals as ‘DRC conflict undeterminable’ and need not undertake the independent third-party audit. However, even during this grace period, the company must still explain its due diligence process and report on efforts to mitigate the risk that its conflict minerals benefit armed groups in the covered countries, including measures to improve its supply chain diligence. 

What has happened since the rule’s adoption?

Since the rule’s adoption, businesses have exhibited a variety of reactions, ranging from full-bore implementation at one end of the scale to disbelief and inaction at the other. Many that are as yet unwilling to mobilise compliance efforts point to a court challenge to the final rule brought by the National Association of Manufacturers and other business groups, which the parties agreed would be subject to expedited briefing in the US Court of Appeals in the hope that the court could decide the issue by the end of calendar year 2013 (NAM v. SEC, No. 12-1422 (D.C. Cir.)). The case was set for oral argument on 15 May 2013, but a late April opinion on another Dodd-Frank Act requirement revealed the Court of Appeals’ view that it lacked original jurisdiction over challenges to this type of final rule. After the Court of Appeals then cancelled oral argument in the conflict minerals case, the business groups moved on 30 April for leave to transfer the action to federal district court, which request was granted on 2 May. There is little doubt this transfer will delay a court decision, which will in any event be subject to appeal, making it unlikely judicial resolution of the matter could result before the 31 May 2014 conflict minerals rule filing deadline. Practitioners advising companies subject to the conflict minerals rule continue to urge them to move ahead on compliance with the rule as issued, as it is unrealistic to expect any relief from the courts before the first reports are due. Even then, prospects that the courts will invalidate the rule are no better than 50/50. 

To their dismay, many companies that are not publicly traded have discovered they are nonetheless ensnared in the conflict minerals rule’s diligence obligations. Manufacturers realised early on that they would need the help of their upstream suppliers to have any hope of tracing the source of the conflict minerals used to make their products. 

Using commercial leverage to press for information, the buck has passed ever upwards in the supply chain, with no distinction as to whether any supplier along the way has any duty of its own to report to the SEC, or even engages in direct activities in the US. Suppliers ignore these information requests at their peril.

Meanwhile, other countries are also interested in the conflict minerals issue and considering what actions they should take. In April 2013, the European Commission issued a consultation soliciting comments on a potential initiative that would ‘complement’ the US conflict minerals regime. Questions on which the EC is seeking comment include whether additional minerals besides the 3TGs should be covered, the appropriate geographic scope of an EU program, whether smaller companies should be exempt, and what specific segments in the supply chain should be targeted. The deadline for comments is 26 June 2013. 

For its part, Canada introduced proposed Bill C-486 in late March 2013, which would impose diligence and disclosure obligations that in some cases go beyond the US rule, for example, to include mining. Prospects for passage of this legislation are unclear. 

Key areas of concern

The SEC deliberately declined to define several key terms in its final rule, leaving these ‘grey areas’ open to case-by-case interpretation. Companies are struggling to make judgment calls on, among others, what constitutes “reasonably reliable representations”, whether a conflict mineral is “necessary to [the] functionality [or] production” of the product, and what it would take for them to have “no reason to believe” a conflict mineral “may have originated” in the covered countries or “may not have come from recycled or scrap sources”. The final rule created so much confusion over whether a “product” like canned soup is, for conflict minerals purposes, the soup, the can, or both, that the SEC included a footnote in its appellate brief saying that it never intended to include packaging within the scope of the term “product”, although many more questions remain unanswered. The SEC has promised to publish guidance, but few expect it to provide the granular kind of interpretation that is needed to deal with the myriad tough calls companies are facing every day. 

Other concerns include making sure the company’s conflict minerals program is effectively linked to relevant risk protection systems, like those directed at Foreign Corrupt Practices Act (FCPA) and UK Anti-Bribery Law compliance. Given the geographic overlap between the conflict minerals regime and areas often targeted in FCPA enforcement cases, businesses need to make coordination of these efforts a priority. 

What happens next?

Not just for the reasons listed above, companies need to get serious about conflict minerals rule compliance now. Perhaps surprisingly, it is not SEC enforcement that presents the greatest worry. The real drivers companies should be concerned about are their investors, shareholders, customers, and competitors. Outside groups are already publishing rankings on conflict minerals compliance, starting with the top 24 international electronics companies, and it is easy to see that products with a ‘DRC conflict free’ label, will have a significant marketing advantage. 

There is no question that compliance with the conflict minerals rule is difficult and burdensome. But the truly savvy companies are the ones thinking right now about how to turn this burden into an opportunity to make lemonade from lemons.


Jane Luxton is a partner at Pepper Hamilton LLP. She can be contacted on +1 (202) 220 1437 or by email:

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Jane Luxton

Pepper Hamilton LLP

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