As part of the Dodd-Frank Act, Congress required the Securities and Exchange Commission to adopt rules requiring disclosures from public companies that manufacture, or contract to have manufactured, products that use so-called “conflict minerals.”
Those minerals, including columbite-tantalite, cassiterite, gold and wolframite and derivatives such as tin and tungsten, originate in the Democratic Republic of the Congo or any of the adjacent countries. You can debate whether the requirement has anything at all to do with the SEC’s core mission of protecting investors, and it likely would be a brief debate. But the SEC had no say in the matter and dutifully proposed and adopted the required rules.
A group including the Chamber of Commerce and the National Association of Manufacturers challenged the rules in court, but so far has been unsuccessful.
So, today, companies are implementing systems designed to determine whether conflict minerals are contained in their products and, if so, where they originated. It has not been an easy process.
First, conflict minerals are much more ubiquitous than most companies expected. Several of the minerals, for example, are common in electrical devices ranging from watches to cell phones to desktop computers. If a product uses electricity, it probably has tin or gold in its solder and contact points. Tungsten is common in many hardened metals, and even in the belting in car tires.
The implementation of these systems is taking a concerted effort by teams, including supply groups, IT, law and compliance, as well as outside consultants for most companies. Suppliers for the most part do not know where their minerals originated, and their first response to the inquiries from their customers most often is a simple “we don’t know.” That answer suffices only in the short term.
The SEC adopted the rules in 2012, which were effective on January 1, 2013. That means that the systems required by the rules should have been in place since the beginning of this year. Very few of the more than the estimated 6,000 public companies that use conflict minerals had their systems fully in place then. Based upon anecdotal reports, I suspect that a significant majority still do not. The first reports required by the rules must be filed with the SEC in May 2014 and will cover 2013. I expect there to be more than a modest amount of creative writing involved.
Because companies were understandably ill-equipped for the rules and virtually no external resources existed at the beginning of this year, last month I petitioned the SEC to permit an additional year for companies to comply (in the case of foreign manufacturing, two years), and in the interim, to provide alternative disclosure requirements that would fully inform investors regarding the status of their implementation efforts.
The intent was to make a balanced proposal that would improve disclosure rather than force companies into half-baked and premature revelations. It would be hard for a company or a group of companies to ask for a deferral, largely because to do so functionally would be an admission that they did not think that they would be compliant in time. And that would effectively paint a target on their backs for the SEC and the activists who advocated for the rules in the first place. I thought it was appropriate for someone to speak up on their behalf.
The proposed alternative disclosure includes ten items, the most significant of which are:
- Identification of the individuals and consultants who are working on the compliance efforts.
- Status of the development of a conflict minerals policy.
- Status of the review of products to determine whether they contain conflict minerals.
- Status of the due-diligence efforts with respect to the origins of the conflict minerals, with specific reporting, on a no-name basis, regarding the ten largest suppliers.
- Expectations with respect to the timing of completion.
Collectively, this is much more information than investors currently have, and it would be available much sooner than next May. Moreover, as with the disclosures in the late 1990s with respect to Y2K readiness, it will encourage companies to push their process as fast as reasonably practicable so that the disclosure is as positive as possible.
We will see whether the SEC gives the petition the consideration that the rules require. While there are not many petitions filed in the first place, most of the petitions that are filed are by single-interest groups with a political agenda or businesses with an ax to grind.
As a result, virtually all are dead-on-arrival at the SEC and never heard about again. My hope is that the SEC will appreciate that this petition is a sincere effort to improve public company disclosure for the betterment of companies and investors.
There is a secondary lesson here. The SEC increasingly is being required to impose rules reflective of a political agenda rather than a good-disclosure objective. The recent rule requiring companies to disclose the ratio between the chief executive’s pay and that of the median pay of all other employees is an example.
Companies need to take a more active role in commenting on such rules and not relying on their trade associations to carry the load. If they are too busy to do so, they should insist that their outside counsel, as part of their professional responsibility, comment instead. Only if it hears from those who are directly affected can the SEC implement rules in the least problematic way possible.
Brinkley Dickerson is an Atlanta partner with Troutman Sanders LLP, an international law firm.