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SEC commissioners call for halt to conflict minerals rule

Source: Thomson Reuters Foundation - Mon, 28 Apr 2014 17:30 GMT
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Prospectors pan for gold at a new gold mine found in a cocoa farm near the town of Bouafle in western Ivory Coast March 18, 2014. REUTERS/Luc Gnago
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By Stella Dawson

WASHINGTON (Thomson Reuters Foundation) – Two Republican members of the Securities and Exchange Commission called on Monday to halt to a new regulation that requires manufacturers to check their supply chains for conflict minerals from the violence-torn regions around the eastern Democratic Republic of Congo.

The rule, due to take effect on June 2, is strongly supported by human rights advocates. They say it already is reducing violence in the region by cutting off a primary source of finance for rebels who rely on the illegal mining of tantalum, tin, gold or tungsten commonly used laptops, cellphones, cars and airplanes.  

But Commissioners Daniel Gallagher and Michael Piwowar said that since the U.S. Court of Appeals ruled in early April that part of the conflict mineral regulation violates companies’ First Amendment rights, its implementation should be stayed until all legal challenges have been resolved.

“Marching ahead with some portion of the rule that might ultimately be invalidated is a waste of the Commission’s time and resources—far too much of which have been spent on this rule already—and a waste of vast sums of shareholder money,” they said in a joint statement.

An SEC spokesman had no comment on the agency’s next move.  An agency person familiar with the matter, however, said that the staff is most likely going to recommend that the SEC press ahead with implementation but that no final decision has been made by the five-member commission.

The conflict mineral rule requires publicly listed companies to conduct internal inquiries into the origin of the minerals used in their products and then file a report with the SEC. 

The U.S. Court of Appeals for the District of Columbia Circuit in April affirmed  a part of the rule permitting the SEC to require companies to conduct due diligence on the minerals’ origins, but it also struck down another part of the rule on the grounds that it would violate the free speech of companies to force them to publicly state that their products are not “conflict free”.  Three business groups that had challenged the rule, the National Association of Manufacturers, U.S. Chamber of Commerce and Business Roundtable, had argued this would be a form of political speech.

Companies preparing for the regulation say that checking their supply chains is an extremely complicated and costly process. The SEC staff has put a $3-4 billion price tag on initial compliance.

While human rights groups were disappointed the court threw out requiring a company to pass a verdict on the content of their products, they said the decision would not undermine the purpose of the conflict minerals rule since due diligence checks and the SEC reports would still have a chilling effect on manufacturers.  

Already their work has had some impact.  Enough Project, a U.K.-based group working to end genocide, reported in 2012 that four leading electronic firms -- Intel Corp., Hewlett Packard, Motorola Solutions and Apple – have established programs for keeping minerals from rebels in the DRC conflict zone out of their supply chains, and DRC officials have said it is starting to lessen the violence.

Twelve Democratic lawmakers last week urged the SEC Chair Mary Jo White not to cave into pressure to delay the rule.  White has not taken a public position recently on conflict minerals, although in a speech last year she questioned Congress using the securities regulator, whose primary purpose is investor protection, as a tool to achieve essentially political ends.  The SEC had no immediate comment on its next step.

It is still unclear what will happen to the case following the court’s ruling.  The court remanded it to a lower court for further proceedings on the free speech issue.  However, the court also said it could be consolidated with a free-speech case involving a meat-labeling rule that is due to be reheard before the full appeals court on May 19.

In their joint statement, Gallagher and Piwowar said that they believe the district court, which may next consider the case, “could and in our view should determine that the entire rule is invalid.”

By striking down the requirement to declare that certain products are “not DRC conflict free”, the U.S,. appeals court failed to resolve the First Amendment problem, they said, because for companies to described the due diligence process in a report “would suggest that the issuer may have ‘blood on its hands,’” they said.

Moreover, they said they believe that the “name and shame” element of the conflict minerals rules, as passed by Congress as part of the 2010 Dodd-Frank Wall Street reform bill, is inseparable and central. “Thus disclosure about the due diligence process should not be seen as severable from the unconstitutional scarlet letter of not DRC conflict free,” they wrote.

(Additional reporting by Sarah N. Lynch at Reuters) 

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