Bloomberg News

SEC Said Poised to Make Companies Report Business With Warlords

July 25, 2012

SEC Said Poised to Make Companies Report Business With Warlords

An artisan miner searches for cassiterite, better known as tin ore outside Goma, DRC. The red rock is very valuable and it's the most traded metal on the London Exchange. It's used in computers and mobile phones and the DRC has one of the highest deposits in the world. Photographer: Per-Anders Pettersson/Getty Images

Companies would have to disclose whether they buy metals from central African warlords under a rule the U.S. Securities and Exchange Commission is poised to adopt next month, said a person with knowledge of the agency’s deliberations.

The so-called conflict minerals rule is opposed by the two Republicans on the five-member commission, according to the person, who spoke on condition of anonymity because the discussions leading up the Aug. 22 vote are private. The rule has sparked two years of debate since the 2010 Dodd-Frank Act mandated that the SEC impose the rule, with some business groups railing against the costs of tracking thousands of suppliers through every link of a chain that leads to their source mines.

Once the rule is in place, the agency estimates 6,000 publicly-traded companies -- mostly manufacturers and retailers -- must report to the SEC where they get their tin, tantalum, tungsten or gold. The rule is meant to halt the flow of mining money to those committing atrocities in the Democratic Republic of Congo by pressuring manufacturers to protect their reputations -- not by issuing an outright ban on using the conflict metals.

The offices of Republican commissioners Troy Paredes and Daniel Gallagher, didn’t respond to messages seeking comment on the vote. John Nester, an SEC spokesman, declined to comment.

Ubiquitous Metals

The metals are in virtually any device with an on-switch. Electronics firms such as Apple Inc. (AAPL:US) use most or all of the metals, and the rule would also affect jewelry makers such as Tiffany & Co. (TIF:US), aerospace companies such as Boeing Co. (BA:US) and retailers including Wal-Mart Stores Inc. (WMT:US) and American Apparel Inc. (APP:US) Since it was proposed by the SEC, the rule has drawn about 40,000 public comment letters.

SEC Chairman Mary Schapiro told U.S. lawmakers in March that the agency can’t bend on setting any minimum amounts for the use of each metal, as requested by manufacturers. The rule will provide a phase-in period for companies to comply, she said, and “will try to give latitude and flexibility in some areas.” She said her agency was “looking close” at the guidelines already in place at the Paris-based Organisation for Economic Co-operation and Development.

In a July 11 letter, the U.S. Chamber of Commerce asked the SEC to scrap its process and start over unless it can fix deficiencies in the rule, such as inadequate accounting for how much it will cost companies to follow. The letter said that a rule adopted through a flawed process “is unlikely to withstand judicial scrutiny.” The Chamber used that cost-benefit analysis argument to successfully challenge in court an unrelated SEC rulemaking.

‘Humanitarian Crisis’

The Government Accountability Office said in a report this month that the Democratic Republic of Congo is the site of “one of the world’s worst humanitarian crises” in which armed groups funded by mining proceeds engage in mass killings, rape, mutilation and sexual slavery. “Some stakeholders’ efforts to improve their initiatives through expansion and harmonization have been hindered” by the SEC’s continuing failure to produce a final rule, the GAO said.

Explaining the process being delayed well beyond Dodd- Frank’s April 2011 deadline for the rule, Schapiro said the topic is “so complex and so out of the ordinary” for her agency.

“Meanwhile, people are still dying in the Congo,” said Patricia Jurewicz, head of San Francisco-based As You Sow’s Responsible Sourcing Network, which sent letters to the agency signed by “uncommon bedfellows” including humanitarian groups, investors and companies such as General Electric Co. (GE:US) and Microsoft Corp. “We’re happy that the rule will be finalized, even if it’s not absolutely everything that we desire.”

Disrupted Sourcing

In the most recent annual reports from U.S.-listed companies, PricewaterhouseCoopers LLP found 49 companies disclosed a risk of disrupted sourcing or pricing from the coming rule, and 70 companies said they are currently unable to confirm their products are conflict-free.

“Most companies don’t have the information they need in order to comply,” Eric Israel, a managing director at the accounting firm, said in an interview. “There will be industries out there that will probably be very unhappy because they thought this was insignificant.”

To meet the conflict-free standard, Israel said companies should invest in information technology and vendor management. Because he and other observers of the rulemaking expect the conflict-minerals disclosures will appear in annual reports, company heads will sign off on the information, meaning “executives will be responsible,” he said.

‘Wait-And-See’

“There are a lot of public companies that are taking a wait-and-see attitude,” said Michael Littenberg, an attorney at Schulte Roth & Zabel LLP in New York who represents firms affected by the rule. “By the afternoon of Aug. 22, there are going to be a lot of people treating this rule very seriously.”

A 3-2 outcome wouldn’t be unusual for an SEC vote. In a review of 749 SEC votes from December 2010 through November 2011, Schapiro, a political independent nominated by President Barack Obama, always voted with Democrat Elisse Walter. The other Democrat, Luis Aguilar, voted in opposition to them only twice. The three showed showed an unusual disagreement over the approval of the agency’s consolidated audit trail earlier this month, when Schapiro sided with the two Republicans.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net.


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