How Congo Became a Corporate Governance IssueA few months ago, the U.S. Court of Appeals for the D.C. Circuit upheld portions of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the “conflicts mineral rule.” The rule, enacted by Congress in July of 2010,requires certain public companies to provide disclosures about the use of specific conflict minerals supplied by the Democratic Republic of Congo (DRC) and nine neighboring countries. In the D.C. Circuit case, the National Association of Manufacturers, or NAM, challenged the SECs final rule implementing the conflicts mineral rule, raising Administrative Procedure Act, Exchange Act, and First Amendment claims. The D.C. Circuit agreed with NAM on its third claim and held that the final rule violates the First Amendment to the extent the rule requires regulated companies to report to the SEC and to post on their publically available websites information on any of their products that have not been found to be “DRC conflict free.” Despite this adverse ruling, the SEC made it clear that the conflicts minerals rule is here to stay: in a statement on the effect of the D.C. Circuit’s decision, the SEC communicated its expectation that public companies continue to comply with those deadlines and substantive requirements of the rule that the D.C. Circuit’s decision did not affect. So, what is the conflicts mineral rule, how far does it reach, and what are public companies doing to comply?

In an unusual attempt to curtail human rights abuses in Africa through regulation of U.S. public companies, the conflicts mineral rule requires companies to trace the origins of gold, tantalum, tin, and tungsten used in manufacturing and to file a report on a new SEC form, Form SD.  The SEC’s final rule implementing the conflicts mineral rule provides for a three-step disclosure process. As part of the first step, the issuer must determine whether its manufactured products contain conflict minerals that subject it to the requirements of the rule. The second step requires issuers to determine whether its necessary conflict minerals originated in the covered countries, which includes conducting a “reasonable country of origin inquiry” (RCOI). Last, an issuer with necessary conflict minerals from covered countries that are not recycled or scrap sources must conduct due diligence and potentially provide a Conflict Minerals Report. The SEC has provided a flowchart summary of the final rule to guide issuers through these steps. 

The conflicts mineral rule is complex and far-reaching, directly affecting more than 6,000 U.S. issuers. Hewlett-Packard (HP) estimates that about 1,000 suppliers in its chain ultimately provide a product to HP that may contain one or more of the conflict minerals. The SEC expects initial compliance costs of $3 to $4 billion, and has estimated that three out of four issuers subject to the conflicts mineral rule will need to file an audited Conflict Minerals Report.  

The rule sets an international precedent for the rigorous way in which it demands tracing of conflict minerals. Struggling with this mandate, companies have formed cross-functional teams to track the minerals in their supply chains. Many companies delegated this regulatory burden to groups headed by members of their regulatory affairs, legal or corporate compliance departments. Others placed the issue with sustainability or environmental health and safety departments. As to the actual tracking of products in the supply chain, the strategies vary across the board. One approach aims to make smelters the point in the supply chain where minerals are certified as conflict free, while another standardizes conflict mineral information suppliers give to end users. Still another aims to verify the custody of minerals from conflict-free mines to conflict-free smelters. Sensing the reputational risk that comes with the use of conflict minerals, some companies have committed to using only conflict-free materials. While using these type of materials can involve paying higher costs, these companies have determined that damage to reputation and goodwill stemming from use of conflict minerals outweigh the costs associated with using conflict-free minerals. 


The first Conflict Minerals Reports were due to the SEC on June 2, 2014 to report on the 2013 calendar year. Initial reports filed by public companies with the SEC indicate that many companies have not dug deeply enough to uncover potential sourcing problems in their supply chain. IBM and HP were among dozens of firms that found gold sourced from North Korea, which is under sanctions, in their supply chains. E&Y provided a great analysis of the initial wave of filings. 


Based on its complexity and far reach, the conflicts mineral rule will continue to pose a compliance challenge for U.S. companies trying to compete in a global economy. Identifying the original source of these minerals can be challenging, but the risk of doing nothing about it is growing.