SEC takes aim at ‘blood minerals’
WASHINGTON — U.S. officials deployed new financial weapons to try to end the bloodshed in Central Africa and the exploitation of natural resources worldwide, raising the ire of corporations that said the rules could cost them billions of dollars.
The Securities and Exchange Commission voted Wednesday to require companies to disclose their use of four key minerals — gold, tin, tungsten and tantalum — mined in and around the war-ravaged Democratic Republic of Congo.
The minerals, known as blood or conflict minerals because their sale helps finance armies in that region, are essential to the manufacturing of mobile phones, medical equipment, automobile electronics and hundreds of other products.
The agency also enacted rules requiring publicly traded companies to disclose payments to governments related to the extraction of oil, natural gas or other important resources.
The regulations have a controversial goal: Leverage U.S. economic power to bolster the nation’s foreign policy efforts. Human rights and environmental groups strongly supported the rules, which were championed by some members of Congress and mandated in the 2010 financial reform law.
“We as a nation, as consumers and as industry have a responsibility to ensure that our activity in the global marketplace does not support or perpetuate violence,” said Sen. Dick Durbin (D-Ill.), a leading backer of the disclosure rules for conflict minerals.
But a variety of businesses and trade groups complained about collateral damage, and said compliance costs — estimated by the SEC at as much as $5 billion initially and much less in continuing costs — would hinder competition with foreign companies.
“We can’t shoot ourselves in the foot if we want our businesses to compete in a global marketplace,” said Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.
The group, which is considering a lawsuit to block the rules, helped lead an onslaught of objections that forced the SEC to delay adoption of the rules well past an April 2011 deadline. Companies complained to the agency about the potential effect of the rules, and they requested revisions or pushed for the rules to be scuttled.
The concerns came from more than just the high-tech and energy industries. Jeweler Tiffany & Co. objected to listing gold as a conflict mineral because the Democratic Republic of Congo produces so little. And Kraft Food Inc. said it would be forced to track metals used in its factory equipment and packaging for thousand of products.
The SEC has said that about 6,000 companies would have to file disclosure statements under the minerals rule.
In response to extensive feedback, SEC Chairwoman Mary Schapiro said the agency revised its original proposals to reduce the obligations on businesses.
For example, companies will have until May 31, 2014, to make their first disclosures about whether the minerals they use are “conflict free,” meaning they did not finance or benefit armed groups in Central Africa.
And for two years — four years for smaller firms — companies will be able to disclose simply that they could not determine whether the minerals were helping to finance fighting in the Democratic Republic of Congo.
In addition, the mineral disclosure rules would only apply to products manufactured or contracted to be manufactured by a company, exempting store-brand goods that are made by third-parties. Companies also would be able to avoid the disclosure rules if they used recycled or scrap minerals.
“Congress intended to further the humanitarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by conflict minerals originating in the DRC,” Schapiro said. “Congress chose to use the securities laws disclosure requirements to accomplish its goal.”
The SEC did not release the detailed final rules, only summaries. Quaadman said that some of the changes on mineral disclosures were helpful but that the business group would analyze the full regulations before determining whether it would sue to block them.
John Felmy, chief economist for the American Petroleum Institute, said the U.S. should not have taken a unilateral approach with the energy rules.
“The rules will give foreign oil and natural gas companies access to confidential, proprietary information that they could use against U.S. companies when competing for crucial energy resources around the globe,” Felmy said.
The energy and high-tech industries have been working on voluntary disclosure initiatives. And some major high-tech companies, including Intel Corp., Hewlett-Packard Co. and Apple Inc., have earned praise for their efforts to keep conflict minerals out of their products.
The pressure on industry from the pending regulations already have helped reduce the use of minerals from Central Africa, said Darren Fenwick, senior government affairs manager for the Enough Project, which works to end genocide and other crimes against humanity.
The SEC said it could not quantify the effect of the rules on the Central African conflicts or in providing more transparency about energy payments going to governments. But the agency staff said costs for U.S. companies to comply with the rules would be substantial, though less than the highest industry estimates.
For the minerals rules, initial compliance costs would total $3 billion to $4 billion, and ongoing compliance would cost $206 million to $609 million annually, the SEC said. For the energy rules, total initial compliance would cost $44 million to $1 billion, and ongoing compliance would be $200 million to $400 million annually.
The rules were adopted along party lines. Schapiro and the other two Democrats, Elisse Walter and Luis Aguilar, voted for the minerals disclosure rule; Republicans Troy Paredes and Daniel Gallagher voted against it. The energy disclosure rule was approved 2 to 1, with Schapiro and Paredes recusing themselves because of ties to those industries.
The Republicans said the rules went far beyond the agency’s core mission to protect investors and shareholders.
“The SEC just isn’t the right tool for this type of social policy exercise,” Gallagher said.
