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New “Conflict Minerals” Disclosure Rules

On August 22, 2012, the Securities and Exchange Commission (SEC) adopted new controversial rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under these new rules, organizations that issue securities and file financial statements with the SEC must disclose the use of conflict minerals—defined as tantalum, tin, gold, and tungsten—mined in the Democratic Republic of the Congo (DRC) or surrounding counties (including Angola and its Cabinda Province, Burundi, Central African Republic, Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia). In addition, the provisions require organizations to disclose all payments made to either the U.S. or a foreign government for the extraction of oil and minerals.

Companies in the technology, telecommunications, aerospace, auto, electronics, industrial, and jewelry sectors are likely to be most affected, according to PricewaterhouseCoopers.

These rules add a potential initial compliance cost (to be imposed on the nearly 6,000 securities issuers) that reaches into the billions and a potential annual compliance cost between $200 million to $600 million. This could be a devastating blow to some organizations.

Also just as upsetting to businesses is the lack of exemptions for reporting “confidential or comprehensively sensitive information” or exemptions for situations in which reporting payments would violate foreign laws. Opponents to the current version of the provisions argue that these new rules put organizations that are subject to SEC oversight at a competitive disadvantage to large, state-owned companies from Russia, China, Iran, and elsewhere.

Cost of due diligence—in some cases, quite far up the supply chain— and compliance may be too much for some organizations to handle. Although there is a grace period for organizations to set compliance measures in place, how these new provisions will ultimately affect organizations will remain to be seen.

 

A copy of the “Rule for Disclosing Use of Conflict Minerals” can be downloaded here.
A copy of the “Rules Requiring Payment Disclosures by Resource Extraction Issuers” can be downloaded here.