Corporate Governance

The SEC, Social Responsibility, and Conflict Minerals: Crossing the Disclosure Rubicon (Part 3)

By J Robert Brown Jr.

Section 13(p) of the Exchange Act imposed an obligation to disclose the use of conflict minerals acquired from the Congo and neighboring countries.  The SEC has proposed rules designed to implement the provision.  See CONFLICT MINERALS, Exchange Act Release No. 63547 (Dec. 15, 2010). 

In addition to onerous disclosure obligations, the provision essentially imposes a Section 404(b) style attestation requirement.  Companies subject to the disclosure obligations must obtain an "independent" audit of their disclosure.  In effect, therefore, management of the applicable companies will have someone from the outside looking over their shoulder when making the mandatory disclosure. 

Section 13(p) apples to "conflict minerals.''  These include columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives or any others determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country.  Despite the obscure sounding names of many of these materials, they are broadly applicable in the product manufacturing process. 

Cassiterite is commonly used to produce tin.   As the SEC described, "[t]antalum is used in electronic components, including mobile telephones, computers, videogame consoles, and digital cameras, and as an alloy for making carbide tools and jet engine components."  Wolframite is "used to produce tungsten, which is used for metal wires, electrodes, and contacts in lighting, electronic, electrical, heating, and welding applications."

The requirements apply to a broad swathe of countries.  Section 13(p) applies to conflict minerals that originate in the Democratic Republic of the Congo or an adjoining country.  Given the size of the country, it is a large list.  The adjoining countries include the Republic of the Congo, the Central African Republic, Sudan, Uganda, Rwanda, Burundi, Zambia, Angola, and Tanzania.

The provision will be applicable to manufacturers and those that contract with manufacturers.  As the Commission observed:  "Based on the totality of the provision, however, it appears that the legislative intent was for the provision to apply both to issuers that directly manufacture products and to issuers that contract the manufacturing of their products for which conflict minerals are necessary to the functionality or production of those products." 

This can pick up some retail distributors.  As the Commission described:  

• We intend that our proposed rules would apply to issuers that contract for the manufacturing of products over which they have any influence regarding the manufacturing of those products. They also would apply to issuers selling generic products under their own brand name or a separate brand name that they have established, regardless of whether those issuers have any influence over the manufacturing specifications of those products, as long as an issuer has contracted with another party to have the product manufactured specifically for that issuer. We do not, however, propose that our rules would apply to retail issuers that sell only the products of third parties if those retailers have no contract or other involvement regarding the manufacturing of those products, or if those retailers do not sell those products under their brand name or a separate brand they have established and do not have those products manufactured specifically for them.

Manufacturers and those that contract with manufacturers also include companies that mine the conflict minerals or that contract for the mining of these minerals.  

The provision is not expressly limited to public companies.  Nonetheless, the Commission opted to apply the requirements only to those issuers.  In part this was based upon the perceived intent of Congress.  See Exchange Act Release No. 63547 (Dec. 15, 2010) ("Such a broad reading of the provision, however, does not appear warranted given the provision's background and its location in the section of the Exchange Act dealing with reporting issuers.").  In addition, application to private companies would create serious logistical concerns.  Id. ("Also, even if we were to interpret the provision in this manner, it is uncertain how the Commission could administer such a program."). 

We will examine the specific disclosure requirements in the next post.

Full post as published by The Race to the Bottom on December 30, 2010 (boomark / email).