The SEC’s Conflict Minerals Rule

Kelley Drye Client Advisory

If you have Tin, Tantalum, Gold, or Tungsten in your products, even if you didn’t put them there, you need to know what research and reporting the Securities Exchange Commission’s (SEC) proposed Conflicts Minerals Rule, soon to be finalized, will require.

Why Is The SEC Doing This?

\In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act” (Dodd-Frank Act). Tucked away in this legislation is Section 1502, which amends Section 13 of the Securities Exchange Act of 1934 to require manufacturers regulated by the SEC to report if their products contain metals derived from specified conflict minerals” commonly mined in the Democratic Republic of the Congo (DRC) and surrounding countries. The express purpose of Section 1502 is to reduce the violence in the DRC and the surrounding areas by shrinking the market for minerals originating from mines controlled by armed groups participating in the regions internal conflicts. Sales of minerals from these mines are believed to be funding the armed groups, thereby supporting the violence and conflicts. The Dodd-Frank Act directs the SEC to promulgate regulations to carry out the purposes of the Act.

What Products Are Covered By The Rule?

Products containing any amount of tin, tantalum, tungsten or gold are subject to the rule if the metals are necessary to the functionality or production of a product.” Section 1502 names four specific minerals that fall within the requirements of the Dodd-Frank Act. These are columbite-tantalite, cassiterite, gold, wolframite, and their derivatives. In addition, the U.S. Secretary of State may expand the definition of conflict minerals to include other minerals if they are determined to be contributing to conflict in the region. There are four commercial metals derived from the four named minerals that are of concern: tantalum (from columbite-tantalite), tin (from cassiterite), gold, and tungsten (from wolframite). While these metals are technically not minerals, they have come to be referred to as conflict minerals” because they are derived from the specified conflict minerals. It is important to note that the term conflict minerals” means the minerals used to produce any of the four metals, and hence the metals themselves, regardless of origin. Thus, these minerals and metals are considered conflict minerals” no matter where in the world they are mined. The SEC’s focus is whether the conflict minerals are DRC Conflict Minerals,” meaning they were mined in the DRC in mines designated as supporting armed conflict.

What Companies Are Covered By The Rule And What Must They Do?

In December 2010, the SEC posted a proposed rule that would accomplish the purposes of the Dodd-Frank Act, Section 1502. The rule will require any publicly-traded company (“issuers that file reports pursuant to Sections 13(a) or 15(d) of the Securities and Exchange Act of 1934”) for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured,” by that company do the following:
  • Disclose in its annual report to the SEC whether its conflict minerals originated in the Democratic Republic of the Congo or an adjoining country.
  • If so, furnish a separate Conflict Minerals Report (CMR) as an exhibit to its annual report that includes, among other matters, a description of the due diligence exercised on the source and chain of custody of its conflict minerals.
  • Provide a third-party, independent audit of the company’s CMR.
  • In the CMR, certify that the company obtained an independent private party audit of its report and provide the audit report.
  • Make these CMRs available to the public on the company’s internet site.

While the reporting requirements of the rule are limited to publicly-traded companies, it has become apparent that the sweep of the rule will be far greater. Finished goods manufacturers of such products as electronics, automobiles, and telecommunications, to name just a few, have products that contain thousands of component parts that are purchased from hundreds or thousands of suppliers. Most of the large members of these industry sectors will be publicly-traded companies required to report. To do so, they will find it necessary to institute complex supply chain tracing, or tracking, schemes from the finished product back to the mine/smelter/refiner. Many non-publicly-traded companies along the supply chain will thus be caught in the mineral source-tracking processes, at the insistence of their customers. This pressure throughout the supply chain is being reflected in customer demands that suppliers certify that their material is DRC Conflict Mineral Free.” Indeed, letters making such demands have already been reported from numerous industries.

What Will The Rule Cost Manufacturers?

The SEC originally estimated the cost of the rule would be $73 million, with 6,000 manufacturers impacted. However, for the reasons just described, the number of manufacturers to be cost-impacted is now expected to be much larger than the original estimate, with total costs in the billions of dollars. The National Association of Manufacturers, for example, has estimated through detailed studies that the cost will be $9-16 billion.

When Will The Rule Be Final?

The SEC was required to have its rule finalized by April of 2011. However, the issues raised by concerned parties during the comment period were so extensive that the SEC announced that it would delay publication of the final rule to the August - December 2011 time frame. As of early November, the SEC had still not published a final rule.

The SEC continues to struggle with the issues raised by interested parties. On October 18, 2011, the commission conducted a five-hour roundtable in which it raised numerous questions about the rule’s definitions and requirements. Following the roundtable, the SEC opened a new comment period (closed November 1) to receive further input on the issues.

The SEC is under considerable pressure to finalize the rule before the end of 2011. First, the Commission is already months beyond the April 2011 congressional deadline to issue the rule. Second, and perhaps most importantly, if the rule is finalized by December, companies with calendar fiscal years will have to file their first reports in 2012. If the rule is not finalized until January or beyond, then these companies will file their initial reports in 2013.

What Issues Remain To Be Resolved?

The SEC’s current thinking on issues remaining to be resolved is best gleaned from a review of the questions the commissioners asked at the previously mentioned roundtable on October 18. The commissioners questions included:
  • The proposed rule declares recycled scrap conflict free but due diligence, a Conflict Minerals Report (CMR), and a third party audit are required. Is this an appropriate balance?
  • Should the SEC limit the rule to the 3Ts (tantalum, tungsten and tin) and gold, or should other metal derivatives from the four listed minerals (cassiterite, etc.) be included?
  • Should mining be considered manufacturing, so that the ore is a manufactured product” under the rule?
  • How can the SEC clearly define necessary to the functionality of a product?” Should there be a de minimis exemption? Should there be a requirement that the mineral is intentionally added,” i.e. if it is an impurity, is this excluded from the rules requirements?
  • Should decorative parts (e.g. decals) be considered part of the product?
  • Should retailers that have their names on products be considered to have contracted to manufacture” such products?
  • Should the SEC be more specific about what qualifies as a reasonable country of origin inquiry?”
  • What standard should the rule impose for due diligence?”
  • Should reporting requirements for gold be delayed?
  • What are the scope and objectives of the third party audit? What should they be?
  • Should the audit be based on a performance standard or an attestation standard? An attestation standard would be akin to a financial audit, would require a CPA, and would be much more expensive.
  • When should submission of the CMR be required and what form should be used?
  • Should there be a transition rule for current stockpiles? Should stockpiles be exempt?


Despite lingering concerns and feedback that the timeline for implementation is too fast, political pressures on the agency will likely lead to the Conflict Minerals Rule being finalized in December 2011. Companies that will be subject to the rule should assess how the rule will impact their operations and costs. Communications up and down the supply chain will be essential to minimizing the impact.

For more information, please contact:

Laurence J. Lasoff
(202) 342-8530