How the SEC's Shift on Conflict Minerals Will Impact Electronics

Portions of the electronics industry are applauding a policy shift toward the so-called “conflict minerals” rule that requires publicly traded U.S. companies to disclose the use of tin, tantalum, tungsten and gold (3TG) sourced from war-torn regions of Africa. Acting Securities and Exchange Commission (SEC) Chair Michael Piwowar has directed agency staff to reconsider how companies should comply with the rule and whether "additional relief" from its requirements is necessary.

The IPC electronics trade association, which has been active in developing conflict-minerals compliance guidelines, said in a statement: “Federal policy on conflict minerals continues to move in the right direction, due in part to the persistent educational and advocacy efforts of organizations like IPC. While IPC members share the widely-held concerns about reports of mining-related human rights violations in the Democratic Republic of Congo (DRC), we believe that the U.S. Securities and Exchange Commission’s (SEC) rules have been ineffective in addressing these concerns and have had unintended negative effects.”

The SEC’s move is unsurprising as the Trump administration has begun to roll back regulations that were passed during the Obama presidency. The Environmental Protection Agency (EPA) and Wall Street reform are two areas targeted by the new administration as overly burdensome to businesses. The conflict minerals rule is part of the Dodd-Frank Wall Street Reform Act that was passed in 2010.

The SEC has not aggressively tried to enforce the rule, which has also faced challenges in court. The electronics industry has maintained the rule is costly and burdensome, but many electronics companies have embraced the effort that seeks to boycott 3TG sourced from the Congo and other conflicted regions in Africa. Rebels in these locales enslave the workers that mine 3TG ores and use the proceeds to fund genocide and terrorism.

Capacitor manufacturers such as AVX Corp. and Kemet – heavy users of tantalum—have spearheaded electronics industry efforts toward conflict-free sourcing. Companies are encouraged to map out their raw materials supply chains down to sources of mineral ores and identify companies that smelt, refine and ship the ores. AVX and Motorola Solutions were founders of the Solutions for Hope tantalum program that tests the feasibility of responsible sourcing; heavy hitters such as Flextronics, Hewlett-Packard and Intel have joined the effort.

It is unlikely, given the electronics industry's investment, that compliance efforts will simply be dropped. Many companies are embracing the ideals of positive change through corporate social responsibility (CSR) programs. In 2015, for example, the electronics industry was one of the most conflict-minerals compliant segments in U.S. manufacturing, according to Dr. Chris Bayer of Development International, who conducted the Conflict Mineral Benchmarking Study RY2015. The top 13 compliance leaders – companies that met all compliance criteria outlined by the SEC and the Organization for Economic Co-operation and Development’s (OECD) – were Qualcomm, Intel, MSC Industrial Direct, China Mobile, Curtiss Wright, Chicago Bridge Iron, Hughes Satellite Systems, Internet Initiative Japan, Aptargroup, Key Technology, Hasbro, Cree and Nvidia.

Bayer adds that the SEC's new position effects only a small portion of the conflict-minerals rule. "The crux of the issue for the District Court was [the] law's First Amendment violation involving the possible self-incrimination of the issuer [of conflict-minerals information]. But no other disclosure items under Section 1502 [of Dodd-Frank] were flagged as problematic by the District of Columbia court. At first glance, Acting Chairman Piwowar thus risks being accused of not carrying out laws promulgated by the U.S. Congress," Bayer said.

"While the conflict-status of the necessary minerals is the final due diligence conclusion at which a company would arrive," he added, "the other information collected and reported in compliance with the law is still of value. Without the mandated transparency -- or symmetry of information -- in the markets that consume 3TG enabled by Section 1502, it will be much more difficult for companies to responsibly source 3TG -- for those that wish to do so."

For reporting year 2015, Bayer said, "456 issuers discussed 'conflict minerals' in their 10-Ks – most in the 'Risk Factors' section of their respective submissions. [Four hundred fifty-six] issuers comprises 37.37% – just about one-third – of the 1,220 issuers that duly submitted a conflict mineral disclosure pursuant to Dodd-Frank Section 1502 in reporting year 2015. Which means, one-third of all public companies exposed to the rule felt it prudent to discuss the conflict status of 'conflict minerals' in their products to investors. Wouldn't a specialist in 'materiality' and someone who recently led the SEC through the Regulation S-K development, not also be concerned about what would happen to markets in which material information was now withheld from shareholders and investors? "

The IPC said it “appreciates the April 7 statement by SEC Acting Chairman Mike Piwowar that the agency is suspending enforcement of the costliest requirements of its conflict minerals rule. IPC encourages the SEC and Congress to keep moving in the direction of reducing this rule’s burdens on U.S. manufacturing industries and the people of the DRC." Bayer counters, saying conflict minerals disclosure is about more than cost. "Rock-bottom raw material prices coming out of the DRC -- especially tantalite, for example, putting other tantalite mines out of business -- also has created revenue for companies in those supply chains dealing with those minerals. Also, many companies, also those that are IPC members, are genuinely interested in their social impact, and take seriously the social dimension of their global footprint. Also, it is unclear how trade associations, which are 'concerned about reports of mining-related human rights violations,' might seek to effectively address this issue with a law in which the charge to conduct a due diligence inquiry is no longer enforced. "

Manufacturers will still have to do the RCOI (Reasonable Country of Origin Inquiry), according to Michael Kirschner, president of compliance consultant Design Chain Associates (DCA), LLC. "If no conflict minerals originate from conflict mines, they will have to 'disclose its determination and briefly describe the reasonable country of origin inquiry it undertook in making its determination and the results of the inquiry it performed.' And, of course, they won’t have to state that the products they sell are not conflict-free, so some degree of cost is eliminated."

The SEC announcement comes of the heels of the EU’s passage of its own conflict minerals regulation. Proponents of such legislation assert the efforts have had a positive impact. The Development International 2015 benchmarking study notes that compliance leaders can positively influence their supply chains. Based on a company's purchasing power and its due diligence performance, the study found Apple, General Motors, Honda Motor, HP, China Mobile, Cardinal Health and Microsoft exercised the most influence in 2015. DCA's Kirschner adds that non-governmental agencies (NGOs) are evaluating conflict-minerals disclosure forms and making their conclusions known in an attempt to provide the oversight and visibility the rule had enabled.

Businesses also want to be viewed by their customers as "doing the right thing." “Not all electronics companies were happy with the law but years after it first went into effect, few today will champion its repeal and even fewer enterprises will say it is okay to include the conflict minerals in their supply chains," writes EPSNews Editor-in-Chief Bolaji Ojo. "In fact, as some electronics enterprises have hinted, compliance with the conflict minerals rule will continue until the war in the Congo is a distant memory. That’s not anytime soon."