SEC Conflict Minerals Rule Enforcement: Compliance Considerations

SEC Conflict Minerals Rule Enforcement: Compliance Considerations

The SEC’s conflict minerals rule, enacted in 2012 as part of the Dodd-Frank Act, requires companies to disclose their use of certain minerals originating from the Democratic Republic of Congo or adjoining countries. The rule was intended to increase supply chain transparency and discourage the use of minerals that fund armed groups in the region. However, implementation has faced challenges and the rule remains controversial.

This article provides an overview of the conflict minerals rule, key compliance considerations, and the current enforcement environment. We’ll cover the rule’s background, reporting requirements, challenges with compliance, litigation and uncertainty around enforcement, and steps companies can take for compliance.

Background of the Conflict Minerals Rule

Section 1502 of the Dodd-Frank Act directed the SEC to issue a rule requiring disclosure of the use of conflict minerals. The term “conflict minerals” refers to tantalum, tin, gold, or tungsten mined in the Democratic Republic of Congo and adjoining countries.

Congress enacted this provision out of concern that profits from mining and trading these minerals were being used to fund armed groups engaged in human rights abuses in the region. The goal was to increase supply chain transparency and reduce use of conflict minerals, thereby cutting off funding for these groups.

After a rulemaking process, the SEC adopted the final conflict minerals rule in August 2012. It took effect in November 2012 and applied to companies that file reports with the SEC under the Securities Exchange Act of 1934 [1].

Conflict Minerals Reporting Requirements

The conflict minerals rule added disclosure requirements set out in Form SD and Item 1.01. It applies to any company that manufactures or contracts to manufacture products containing conflict minerals that are “necessary to the functionality or production” of the product [2].

Affected companies must conduct a reasonable country of origin inquiry (RCOI) on the source and chain of custody of conflict minerals used. This inquiry must be reasonably designed and performed in good faith.

If a company determines that conflict minerals did originate from covered countries, or is unable to determine their origin, it must exercise due diligence on the source and chain of custody. The company must also file a Conflict Minerals Report as an exhibit to Form SD [3]. This report describes the due diligence process and results.

The Conflict Minerals Report must include:

• Description of due diligence measures taken
• Facilities used to process conflict minerals
• Country of origin of conflict minerals
• Efforts to determine mine or location of origin

For minerals from scrap or recycled sources, companies must disclose the due diligence measures taken. They do not need to identify countries of origin, facilities, or mines [3].

Challenges with Conflict Minerals Rule Compliance

Since it took effect, the conflict minerals rule has posed implementation challenges for many companies:

• Complex global supply chains make tracing minerals difficult
• Lack of infrastructure in Congo region hampers due diligence
• Rule seen as burden with unclear benefits
• Costly compliance for some companies, especially small businesses

The complexity of global supply chains makes tracing conflict minerals back to their origin very difficult. Minerals pass through many hands between the mine and end product. Suppliers may not fully cooperate with inquiries about sourcing.

Additionally, lack of infrastructure in the DRC and adjoining countries hampers due diligence. Mines are often small and informal, with few records. This makes identifying facilities and mines of origin challenging [3].

Some companies argue the rule places an undue compliance burden on them for uncertain benefits. Costs of compliance have also been an issue, especially for smaller companies with limited resources.

Litigation and Uncertainty Around SEC Enforcement

The conflict minerals rule has faced legal challenges since adoption. This has created significant uncertainty around its enforcement.

In April 2014, a court ruled that the requirement to describe products as “not found to be DRC conflict free” violated the First Amendment. This led the SEC to issue guidance that it would not pursue enforcement actions against companies not meeting this requirement [4].

However, companies were still expected to file Form SD and conduct due diligence. In 2017, the SEC issued another statement saying it would revisit this guidance and consider further steps [4].

But there have been no major updates since. The litigation remains ongoing, leaving the enforcement status uncertain [5].

Steps for Conflict Minerals Compliance

Despite the uncertain enforcement environment, many companies continue working towards compliance. Steps include:

• • Survey suppliers about conflict minerals sourcing
  • Perform due diligence to trace minerals to origin
  • Develop responsible sourcing programs
  • File Form SD annually by May 31 deadline

Even with uncertain enforcement, companies should continue conducting due diligence and filing Form SD. This shows a good faith effort at compliance. It also prepares companies in case the SEC ramps up enforcement in the future.

Steps for ongoing compliance include:

• • • Maintain documentation of due diligence processes and results
    • Continue surveying suppliers about conflict minerals sourcing
    • Perform due diligence annually on supply chains
    • Update any risk mitigation plans as needed
    • File Form SD by the May 31 deadline each year

Some tips for smoother Form SD filing:

• • • Start the process early each year
    • Ensure all required information is included
    • Use the specialized software tools available
    • Work with consultants or legal counsel if needed

While the litigation proceeds, companies should watch for any updates from the SEC on enforcement plans. Continuing compliance efforts helps prepare for any changes.

Some companies go beyond minimum compliance. They have implemented responsible sourcing programs to improve supply chain transparency and ethics. This can mitigate supply chain risks and reputational damage related to conflict minerals.

In sum, companies should see compliance not just as a legal obligation, but as part of responsible supply chain management. A good faith effort demonstrates commitment to ethical sourcing.