SEC's conflict minerals vote comes under fire

SEC's conflict minerals vote comes under fire

The U.S. Securities and Exchange Commission's Wednesday vote to require public companies to disclose whether they use conflict minerals from the war-stricken Democratic Republic of Congo and neighboring countries came under fire this week.

But not from people who opposed it -- from those who argue it doesn't go far enough.

Humanitarian groups said they were disappointed with the final rule, which included a provision allowing companies to report that they couldn't determine the origin of their products.

“It’s a huge loophole that undermines the rule,” said Corinna Gilfillan, head of the U.S. office at Global Witness, of the clause. “The SEC seems more interested in protecting the bottom line of these companies rather than helping the citizens of the Congo.”

The rule, called Section 1502, requires companies to trace their supply chains and disclose if their products use tantalum, tin, tungsten or gold from the DRC, minerals that are said to fuel the conflict in the troubled Central African nation.

The SEC voted 3-2 to adopt the controversial rule, a provision of the 2010 Dodd-Frank financial reform law.

The commission came under fire from humanitarian and environmental groups not solely for what they called a loophole, but also for taking so long to vote on the bill after missing the April 17, 2011 statutory deadline.

The delay was due in part to pushback from various business groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, that claimed tracing their supply chain would be too costly and difficult for companies.

The SEC’s analysis found the initial industry-wide cost for companies to implement the new rule would run between $3 billion and $4 billion. The annual cost was estimated to be anywhere from $206 million to $609 million.

In what looked like a move to placate the business community, the commission granted companies two years, and smaller companies four years, to merely state that they could not successfully determine whether the minerals they use are conflict-free. Companies were also given flexibility on scrap or recycled minerals.

SEC Chairperson Mary Schapiro said during the meeting the final rule “faithfully implements the statutory requirement as mandated by Congress in a fair and balanced manner,” according to a report in the Los Angeles Times.

But humanitarian groups accused the SEC of bowing to pressure from the business community. Gilfillan of Global Witness said allowing companies to deem the origin of their products as undeterminable was a “disastrous decision.”

But some insiders say Wednesday’s vote is a step in the right direction, and it’s only a matter of time before companies see the benefits of a more transparent supply chain.

“It is a historic day,” said Jess Kraus, CEO of Source 44, a company that helps businesses improve the transparency of their suppliers. “As the dust settles and diligence begins, companies will start to see the positive impact Dodd-Frank section 1502 will have on the larger purpose of supply chain transparency and business performance.”

The SEC only narrowly approved the vote. Republican commissioners Daniel Gallagher and Troy Paredes voted against the ruling, stating that securities laws should not be used to further foreign policy goals.

Despite opposition from business groups, a number of big name companies support the rule and have thrown their weight behind initiatives aimed at cutting conflict minerals from the supply chain.

HP (NYSE: HPQ) and Motorola (NYSE: MOT), for example, have taken a multi-pronged approach. As GreenBiz has reported, they are among the 21 companies and organizations that have joined a U.S. government-led effort to reduce the use of conflict-minerals from the DRC. Both companies are also working on advancing a smelter program that identifies and validates smelters that process conflict-free minerals, as well as participating in Solutions for Hope, a project that has established the first validated source of conflict-free tantalum from the DRC.

“We support the SEC’s final rule as well,” said an HP spokesperson on Wednesday. “HP remains committed to taking a leadership role in working with stakeholders and industry peers to develop sustainable, practical solutions that create transparency in the supply chain and promote responsible sourcing of minerals.”

In preparation for the rule, technology company AMD (NYSE:AMD) ran a pilot test to trace its supply chain, said Tim Mohin, AMD’s director of corporate responsibility. The company took two of its products, identified all of the suppliers who provided the materials and sent them each a standard questionnaire. This helped the company pinpoint the initial smelter for each mineral. By using this process, AMD has identified more than 100 smelters, thirteen of which are certified as conflict-free.

“We anticipate that many more will be added as implementation of the rule progresses,” Mohin said.

The efforts on the part of the big companies are starting to pay off, according to a report released this month by the Enough Project. The report, which includes a list of where companies rank on the conflict mineral scale, found that militias in Central Africa have seen a 65 percent drop in revenue on conflict minerals in the past two years, largely thanks to big companies conducting due diligence on their suppliers.

Under the new rule, companies will have until May 31, 2014 to file the first report disclosing whether the minerals they use are conflict-free.