SEC struggles to write ‘conflict minerals’ regulations for companies

October 18, 2011

Financial regulators working on the overhaul of Wall Street rules ventured into foreign territory Tuesday, probing the depths of human suffering in war-torn central Africa and the chemical derivatives of minerals such as columbite-tantalite.

The regulators at the Securities and Exchange Commission usually focus on the workings of the stock market and the fine points of corporate profit statements. But Congress, in ordering the agency to write scores of new rules intended to prevent another financial meltdown, also directed the SEC to tackle a humanitarian crisis in the Democratic Republic of Congo (DRC).

A wide-ranging law enacted last year calls for companies listed on U.S. stock markets to disclose whether their products contain “conflict minerals” — substances that originate in the DRC or neighboring countries. International trade in the minerals is fueling the brutality in the DRC, Congress asserted.

Businesses have argued that the mandate, though inspired by the noblest of motives, would be costly and difficult to implement. But some participants in the debate have argued that the challenges are overstated.

The SEC, which proposed a version of the rule in December but missed an April deadline to finish its work, has been having a hard time translating the law into a rule for companies to follow.

The agency took the unusual step of convening corporate representatives and human rights advocates Tuesday to collect additional input. The witnesses discussed the complexities of global supply chains for products as varied as refrigerators, fighter jets, jewelry and biscuits.

Sen. Richard J. Durbin (D-Ill.), a backer of the conflict minerals provision, stepped to the lectern at the SEC on Tuesday and described scenes he witnessed in Africa, including grievously injured victims of gang rape sitting in the dust as they waited for scarce medical care.

He said the pursuit of precious minerals is driving the conflict, and the value of the minerals is being driven up by consumers’ “insatiable appetite for iPads and BlackBerrys and cellphones.”

“For those of us who enjoy these products every day, I’d like to enjoy it with a clear conscience,” Durbin said.

But a lawyer for Boeing said minerals are embedded in millions of parts from thousands of shifting suppliers and no manufacturer can trace these all the way back to the mine. Unreasonable requirements could cost the aerospace industry hundreds of millions — if not billions — of dollars, which would be passed on to customers such as the Defense Department, Boeing’s Benedict S. Cohen added.

General Electric lawyer Sandy Merber said the matter is not as simple as requiring his company’s suppliers to provide the information, because for now they have no way of complying. He said companies should be given flexibility — for example, the ability to rely on statistical sampling.

Irma Villareal, a representative of Kraft Foods, said her company would fall under the requirement partly because it packages biscuits in tin. She said complying with it would seem overwhelming, noting that her company uses 100,000 suppliers to make 40,000 products. Even discussing the ramifications of the requirement, she said, had made her hyperventilate.

Some participants in the debate said the rule could unintentionally inflict economic harm on Africans.

The discussion raised questions not ordinarily associated with securities regulation. Should the disclosure requirement be limited to tantalum, tin, tungsten and gold? Or should it extend to niobium?

Given that Congress said it should cover substances “necessary to the functionality or production” of manufactured items, what should the SEC do about ornamental embellishments or naturally occurring impurities?

And should there be an exception for substances used in only tiny quantities?

Mike Davis of the advocacy group Global Witness opposed such an exception, noting that the goal was to weaken “extremely murderous and abusive armed groups.”

“You can’t really boil that down to a level at which it’s acceptable to be part of that,” he said.

Any rule the SEC writes must be able to withstand a court challenge. To do that, the SEC must be able to show that it thoroughly assessed the potential costs.

The conflict minerals disclosure is not the only rule of its kind the SEC must write. The agency is also working on requirements that mine operators disclose health and safety violations and that companies involved in the development of oil, gas and minerals disclose payments they make to foreign governments. These payments at times have become the subject of bribery investigations.

Those rules are also past due.

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