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Of Blood Cell Phones and the SEC: The Dodd-Frank Act’s Conflict Minerals Provision

October 21, 2011

We’ve seen the pictures: underfed children shin-deep in dirt, digging in mud. We’ve read the headline, “Blood in Our Cell Phones.” And we know that “It is the sense of Congress that the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo.”

Photo from http://www.soil-net.com. Some rights reserved.

What we don’t know is what to do about it. In a most unlikely marriage, Congress let the SEC have a go. The result is a 113-page SEC proposal; over 26,000 comment letters; a roundtable discussion featuring human rights activists, corporate counsels and auditors; some 40 law firm memos; and countless news reports and blog posts.

The SEC’s proposed rule to implement the Dodd-Frank Act’s conflict minerals provision seems simple.  Any issuer for which conflict minerals (tantalum, tin, tungsten, and gold) are necessary to the functionality or production of a product manufactured by that issuer must disclose whether its conflict minerals originated in the Democratic Republic of the Congo (“DRC”) or an adjoining country. If so, that issuer must describe the measures it has taken to exercise due diligence on the source and chain of custody of its conflict minerals. Further, any issuer furnishing such a report would be required to certify that it obtained an independent private sector audit of its report. 

Enter the law of unintended consequences. According to Mulumba K. Serge, President of CDMC Mining Cooperative in the DRC, the Dodd-Frank Act has led buyers of the mines’ minerals to find alternative sources. As a result, work at the mine has slowed, food and medicine have grown scarce, and parents cannot afford the fees for their children’s school. Knowledge Mosaic’s Green Mien followed the controversy in an August blog post.

Meanwhile, in a much cited statement, Kraft Foods Inc. decried the conflict minerals provision for covering “companies like us” while Congressional Democrats urged the SEC to “put a little more effort” into completing the rules. Add threats from the recently emboldened U.S. Chamber of Commerce to sue over the costs associated with implementing the provisions, and the SEC might feel like it just can’t win.

Help, however, might be on the way. In an October client advisory, Arnold & Porter noted that the Organisation for Economic Co-operation and Development has issued due diligence guidance regarding mineral sourcing. Private and public-private initiatives to produce transparent and accountable supply chains are being established by the electronics industry and gold refiners, among others. The creation of an independent means of certification for users of conflict minerals appears to be on the horizon.

And a not-so-thinly-veiled attempt to counter the U.S. Chamber of Commerce is also underway. Three non-governmental organizations jointly submitted to the SEC a comment letter meant to provide the Commission with cover for its economic analysis. Congressman Jim McDermott submitted a 70-page document showing that the creation of a clean supply chain for tin can be created by 2013 without raising the world price for tin. And a diverse group comprised of human rights groups and corporations (including GE and Microsoft, to name a few), have called for the prompt promulgation of a rule so that compliant supply chains can be established sooner, rather than later.

The SEC, which is still accepting comments, intends to issue a final rule by the end of the year. View the proposal here.

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