Section 1502 of the Dodd-Frank Act mandates the SEC to adopt rules requiring reporting companies to disclose whether certain minerals used in production chains originate from the Democratic Republic of the Congo or its neighboring countries. Minerals sourced from these areas of central Africa often fund militia and other military groups’ operations which have exacerbated internal conflicts and human rights violations. The goal of the recent legislation is to provide transparency to consumers to allow them to make certain choices with respect to the products that they purchase from public companies. Moreover, the disclosure requirements may encourage public companies to seek alternative sources, materials, or suppliers to project a more socially responsible image to consumers.
The SEC estimated approximately 1,200 companies would be affected by the new disclosure rules and would result in an increase in aggregate compliance costs of approximately $71 million. However, a recent Tulane University study argues that the SEC woefully underestimated this cost and that the actual cost is almost $8 billion. The study indicates that some of the reasons for the SEC’s underestimation include a flawed calculation of the number of affected companies, failure to account for the impact on suppliers or privately-held companies in an issuer’s supply chain, and inadequate estimates of costs for internal due diligence reform. Although final conflict mineral disclosure rules have not yet been promulgated, a bi-partisan congressional group has openly urged the SEC to promptly do so.
To view the SEC’s proposed conflict mineral disclosure rules, click here. To view the study conducted by Tulane University, click here. For more information, view Gustav Schmidt’s contact information by clicking here.