Dodd-Frank Act and the SEC Ruling on Conflict Minerals: What it Means for Companies?

by Dr. Wanda Lopuch and Warsame Galaydh



In July 2010, President Obama signed the Dodd-Frank Act in order to change the regulation of America’s financial institutions. One aspect of the act, the § 1502 provision of Dodd-Frank, requires companies to disclose the origin of so called “conflict minerals” and report on the source of these minerals.  The reporting requirement itself will presumably encourage switching supply of these minerals to “conflict-free” sources.

Four minerals are labeled conflict minerals –  tin, tungsten, tantalum, and gold.  Their mining and trade may support groups fueling conflict in the Democratic Republic of the Congo. The US government, acting in the interest of a broad group of stakeholders, intends to implement more economic transparency and use economic forces of global corporations to limit the impact of armed groups in the DRC.

Various armed groups control mining, processing, and trade of natural resources in the DRC.  Prior to Dodd-Frank, using conflict minerals had neither legal nor economic ramifications.   The ultimate goal of the Dodd-Frank Act is to prevent the use of conflict minerals as a source of economic support for the armed conflict.

Upon enacting the Dodd-Frank Act, the Senate requested the Securities and Exchange Commission (SEC) to issue the operational rules. The SEC issued a final ruling on Dodd Frank   § 1502 provision on August 22nd 2012; the first reports are due January 2014. During this interim period, public companies that are subject to SEC ruling are required to adhere to the SEC Final Ruling.

SEC Final Ruling

The SEC Final Ruling has a multi-tiered process for companies in determining the use of conflict minerals.  These are:

  • Companies should determine if  they are subject to the conflict minerals Statutory Provision
  • Did the conflict minerals originate from the covered countries?
  • Company must publish a conflict minerals report if minerals originated from the covered countries
  • A specialized disclosure form should be completed alongside the conflict minerals report
  • An independent auditor should monitor the steps taken with the conflict minerals report and specialized disclosure form
  • Cost of non-compliance is high: the greatest risk of non-compliance is an issuer losing its eligibility to use Form S-3 if it fails to file the Specialized Disclosure Form on a timely basis or its disclosure is non-compliant with the rule

This interim period will last for two years for large companies and four years for smaller reporting companies.  During the interim period, companies must determine if they use conflict minerals during the production process. The difference during the interim period is that companies do not have to have their conflict minerals reports independently audited.

The first step for companies is to find out whether or not they are subject to the Conflict Minerals Statutory Provision. A company is subject to the statutory provision if it uses conflict minerals in a way that are necessary to the functionality or production of a product manufactured.  Conflict minerals are necessary to the functionality or production of a product if the mineral is contained in the product and necessary to the product’s production.

The second step in the process is to see if the conflict minerals originated from the covered countries. Companies move on to the second step if the conflict minerals they use are necessary to production. If the company determines that the conflict minerals did not originate from the covered countries (pre-determined as the Democratic Republic of the Congo and neighboring countries), it should be included in their annual report and published on its Internet website.  A crucial element of the conflict minerals report that must be included by companies taking either the prolonged or route is including a description of its products manufactured or contracted to be manufactured containing conflict minerals that it was unable to determine did not directly or indirectly finance or benefit armed groups in the aforementioned covered countries.

If the company determines that the conflict minerals originated from the covered countries the more prolonged route is taken. The prolonged route includes the specialized disclosure form and the independent audit. The quicker route ends with the publication of the conflict minerals report. The first step in the prolonged process is publishing a conflict minerals report (alongside a certified independent private sector audit report) making the conflict minerals report available on the Internet, and providing the Internet address of that site.

According to the EICC (Electronic Industry Citizenship Coalition) an independent auditor will assess the following during the onsite audit: conflict minerals policy, “mass balance” of materials, and procurement and incoming materials documentation. An auditor calculates a mass balance of materials by summing all the inputs minus all the outputs. The particular smelter or refinery must document their inventory for all incoming material and list then in a line-item summary in preparation for the mass balance of materials.

On top of crafting a conflict minerals report, the company must also furnish a specialized disclosure form including the conflict minerals information.  The SD form should be filed under the Exchange Act is subject to potential Exchange Act Section 18 liability.  Moreover, a company violates Section 18 of the Exchange Act if the due diligence process is found to be unreliable and if the conflict minerals report failed to satisfy the proposed rules.

However, if through the process a company discovers that it does not use conflict minerals through its global sourcing process, it is still required to submit the SD form, the results of the aforementioned inquiry, and due diligence efforts. According to the SEC, the framework recommended is the OECD due diligence framework.

Cost of Implementation

Indeed, the SEC has estimated the cost of compliance running as high as $71.2 million. A Tulane University study estimated the compliance at $7.93 billion and the National Association of Manufacturers said the total cost would run between $9 billion and $16 billion. The same study estimated that half of the compliance would go to personnel while the other half would go to third-parties for consulting, information technology systems and audits. One member of the National Association of Manufacturers estimated the cost of compliance at $10 million per company.  The breakdown of the cost of compliance would mainly be used for hiring 50 full-time employees to review supplier conflict mineral certifications.

Dissenting Points On SEC Ruling

On January 16, 2013, Sidley Austin LLP filed an opening brief on behalf of the National Association of Manufacturers, the Chamber of Commerce of the United States, and Business Roundtable against the SEC. The two main aspects of the legal challenge are the cost-benefits argument and the potential First Amendment violation. The amendment violation argument is that if a company is unable to trace its minerals back to the DRC and label them conflict free companies are falsely associating themselves with human rights abuses; the rule compels speech in violation of the First Amendment.

In the purview of some companies, the interim period is not long enough time as a transition period to undergo independent audits and compliance. Companies believe that the SEC’s estimate is underestimating the cost of independent audits and compliance because it fails to include the supply chain paradigm of companies in a globalized international community. For example, Rory King, director of supply chain product marketing at IHS states, “Large electronic original equipment manufacturers (OEMs) use tens of thousands of parts that must be examined to determine their conflict mineral content. The next nineteen months really is not very much to communicate, collect, analyze, and prepare information on mineral sources across a globally diverse, multi tier value chain.”

Business-Based Solutions

Even though some companies disagree with the Final Rule, some larger companies, supply- chains, and manufacturers have taken the initiative to make sure the use conflict free minerals in the region. In July 2011, Motorola Solutions Inc announced the Solutions for Hope Project. The project utilizes a closed supply line and a defined set of key suppliers: mines, smelter/processor, component manufacturer and end user.  Initiatives made by Motorola Solutions clearly indicate that companies understand that the issue is pressing even with the cost of compliance. By taking initiative now, companies have a greater short term cost; however, in the long run the cost of compliance will be shrink as the intermediary period ends and most if not all companies are complying with the Final Rule.                                                                                                                                                                                      


[author ] WarsameWarsame Galaydh is a graduate student at NYU specializing in International Relations. He focuses on the areas of Pakistan, Afghanistan, and general questions related to International Relations Theory and Political Philosophy. Warsame grew up in Syracuse, New York before moving to Dubai and finally settled in Minnesota where he attended both high school, Mounds Park Academy and college, Carleton College. [/author]
[author ]WandaWanda Lopuch passionately advocates sustainable global development, and oversees many strategic initiatives focused on promoting best practices in socially responsible sourcing. She is the President of MDA Associates, Inc., a consulting organization focusing on “greening” the global operations and their supply chains while improving economic outcomes of businesses in the life sciences, IT, and financial sectors. With 20 years of experience in the pharmaceutical and telecommunication sectors spanning across the United States, Europe, and East Asia, Dr. Lopuch guided international teams for maximizing performance in multinational, multicultural and multi-functional projects. Prior to establishing MDA Associates Inc., Dr. Lopuch was the president of Medical Data Management Inc., the company she founded and grew into a multi-million dollar business with locations in 7 countries. Dr. Lopuch holds a Ph.D. in Administration and Supervision from Marquette University, Milwaukee, WI, and an MS in Computer Sciences from the Wroclaw University of Technology in Wroclaw, Poland. She lectures on various aspects of sustainable and socially responsible business. [/author]
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