Final Conflict Minerals Rules Taking Shape

Uncertainty about the rules for compliance with Dodd Frank’s Section 1502, known as the Conflict Minerals Act, has been hanging over the tantalum industry for about two years. The SEC, which is responsible for developing and promulgating those rules, composed a draft back in 2010. Since then, they have allowed and extended a period of public comment. They have held an array of meetings and received thousands of comments, recommendations and items of correspondence on the issue. Still, to date there has been no finalization.

This uncertainty has contributed to unintended consequences. DRC tantalum can be cheap and while the SEC is dragging its feet in finalizing these rules, consumers could choose profits over ethics and continue buying metal from potentially unethical sources. Instead, many users began shunning metal from the region with good intentions. But this left vast numbers of artisianal miners with little or no means to make a living. With the threat of a shortage of conflict-free tantalum, users also found themselves paying higher prices to obtain it from elsewhere, which drove up manufacturing costs.

Many people are growing increasingly impatient with the SEC. Last month 58 members of Congress signed a letter addressed to SEC Commissioner Mary Schapiro. There is no clear reason for the delay, it said.

“Continued delay undermines efforts in the DRC to make the mining industry more transparent and to diminish the link between minerals and the funding of brutal violence carried out by warlords,” they added.

Members of Congress said the SEC has had enough time and asked the Commissioner to schedule a vote on the final rules for Section 1502 and 1504, dealing with the reporting of payments,  by July 1, 2012 or to provide an explanation for the extended delay and definitive voting date.

Earlier this month the SEC announced the August meeting.

Complications

A  major problem with Section 1502 is that Congress had a noble goal — to end the financing of conflict tantalum — but provided limited direction for achieving it. They further complicated matters by defining certain terms using ambiguous language.

The SEC had to consider what is means to manufacture a product. Are tantalum miners manufacturers? If not, the Congressional definition would omit them. While it could undoubtedly be argued that unprocessed ore is not a manufactured product, the SEC said the proposed rules would deem that mining is manufacturing and that contracting the extraction of ore would be considered a manufacturing contract, also covered by the law.

Another debatable issue arises because Congress specifically stated that the law would “apply only when conflict minerals are necessary to the functionality or production of a product manufactured by a person.”

Tantalum, which is largely consumed by the electronics industry, is often not necessary but rather is preferred. In many cases it allows electronics to be reliable and compact but there are alternatives. In such instances, would the law apply? If not, the largest groups of consumers of the metal could escape regulation.

The SEC noted that tantalum is used as an alloy to fabricate carbide tools. But even if a company uses those tools to make cars, for example, if the cars contained no conflict minerals the law, as proposed, would not apply to them.

The outcome

Even if parties use the minerals in question, if they do not report to SEC or otherwise fit the criteria outlined by the rules, they will not have to make any reports, disclosures or take any action. Some people are calling for broadly written rules, for the sake of effectiveness. Others warn against such a move, saying this legislation is complex, expensive and a hindrance.

Though the Conflict Minerals Act will only regulate a select group in theory, it is expected to have much wider implications. The EU and other nations are reportedly considering conflict mineral sourcing regulations and are closely following the progress of the US rules. California also passed a law prohibiting state agencies from signing contracts with companies that fail to comply with the unwritten regulations.

In the event that the rules are not adopted at the August 22 meeting, Congress could take action against the SEC said Kevin O’Neill, Deputy Secretary in the Office of the Secretary.

He was not able to comment on the the likelihood of that happening  or what Congress could actually do. The statutory deadline for adoption of the rules, April 15, 2011, has long passed and O’neill was able to say that Congress hasn’t taken action thus far.

Securities Disclosure: I, Michelle Smith, do not have equity interests in any companies mentioned in this article.