The long journey through the Securities and Exchange Commission (SEC) of Section 1502 in the Dodd-Frank Financial Reform Act has come to an end. A 3-2 vote adopted the provision that will force mining companies to detail their operations in conflict regions.
For consumers, this means that large electronics companies will be put on the spot to show that they are sourcing their minerals from conflict-free sources. The section has elicited a very strong debate and neither side was very happy with the final decision on Wednesday.
Supporters of the bill say it is a way to reduce the power of armed militias in the Democratic Republic of the Congo. If companies are unable to trade in conflict regions the areas will be forces to make changes in order to enjoy the benefits of international mineral trade. The decline in power will provide more safety for the people who have been brutalized for years.
Despite the SEC ruling in favor of the supporters, they were less than pleased by the decision to include a 2 year phase-in period. “Although the rule appears to have been weakened to placate the U.S. Chamber of Commerce and the National Association of Manufacturers, the threat of a lawsuit by these associations remains,” wrote Sasha Lezhnev and Darren Fenwick of the Enough Project shortly after the bill passed. Fellow Advocacy group Global Witness called the phase-in a “big fat loophole for companies” in a tweet while the SEC was discussing the matter.
Though it was a vote in favor of the section, the decision is by no means the end of the debate. The US Chamber of Commerce looms large with a potential lawsuit that could cause further delays or strike down the legislation altogether.
Congressmen Jim McDermott (D-WA) was also disappointed in the SEC in his statement following the announcement saying, “I am concerned that the SEC ignored the investor benefits of this law and that the SEC’s cost estimate is far too high. The SEC went far in acknowledging this when they noted they made very conservative assumptions; many think the final compliance costs will be much less.”
Further support came from a coalition of ‘sustainable, socially responsible and faith-based’ investors. They too were generally positive and echoed concerns about the timing of the phase-in. “Investors will benefit from this rule, since it promotes transparency at all levels of a company’s operations. We see mandatory reporting to the SEC on raw material sourcing as a much needed step for highlighting risks in the most vulnerable area of a company’s supply chain,” said Lauren Compere, Managing Director at Boston Common Asset Management, LLC.
For supporters, there was good news beyond the affirmitive vote. The OECD five-step due diligence framework featured as a benchmark for the SEC to employ in determining which companies to measure. The international standard will “provide assurances to consumers and investors that they are checking all along their supply chains and taking the necessary steps to ensure that their purchases are not funding conflict,” said Global Witness.
Opponents were unhappy with decision. Some took to twitter to raise their concerns with the legislation. Large companies said that such disclosures would infringe on trade secrets. They also pointed towards the initial compliance cost of ~$4 billion with annual costs of $609 million for the estimated 6,000 companies affected. These claims were dismissed by activists as actions to protect the status quo and avoid responsibility for how minerals are sourced.
A study requested by Senator Durbin, a supporter of the legislation, conducted by Tulne University researchers estimated that it would cost $7.93 billion to implement the regulations outlined in section 1502. The data largely conferred the arguments by corporations who said it would place an significant burden on them.
“Evidence is the best guide, and our economic impact analysis of Dodd-Frank Section 1502 relies on findings from IPC’s 2011 survey. The new law calls for transparency in the mineral sector supply chain and our paper suggests that its implementation will require significant effort on the part of affected companies,” said Chris Bayer, the lead author of the study.
Corporations are not alone in their opposition to the bill. Academics and civil society activists have raised concerns about 1502 as well. They raise concerns that it will cause a de-facto embargo that will harm the artisinal miners who rely on the mining industry. Bill proponents disagree with the characterization saying that the effects are being exaggerated and the conditions faced by the miners are deplorable.
Other arguments against the law include that it will be nearly impossible to accruately trace the source of minerals that can be easily mixed in with others. There are also questions about whether 1502 can actually reduce the level of violence perpetrated by rebel groups in the DRC.
“If there were no minerals, the conflict would still rage on as armed groups would find other sources of revenue. As long as the government is incapable to impose its authority and address the various grievances, the region will not know peace,” wrote Mvemba Dizolele in the Huffington Post.
Governance and security loom large among the problems in the DRC. An article in the Economist on the issue of conflict minerals highlighted this problem.
The Kivus are infested with more than a dozen armed groups who feed off mining. A regional map at the UN compound in Goma shows insurgencies within insurgencies. “There is no security here,” admits a Western aid worker. The UN’s 19,000 peacekeepers are demoralised and itching to go. Mr Kabila would not stop them.
Within the debate over the impact of the rule is the role of the SEC in the proceedings. The members who dissented, Daniel Gallagher and Troy Paredes, both questioned whether it was within the mandate of the SEC to make such rules. Chairman Mary Shapiro disagreed in her remarks saying, “We have received significant public input on this rulemaking, and in response we incorporated many changes from the proposal that are designed to address concerns about the costs. I believe the final rule faithfully implements the statutory requirement as mandated by Congress in a fair and balanced manner.”
For a more comprehensive take of the discussions, take a look at this Storify I put together based on reactions during and after the event:
The issue of conflict mineral legislation continues to bring out impassioned advocates. Yesterday’s SEC decision on the Section 1502 of the Dodd-Frank Act brought out a series of tweets. Here are the highlights of the diverging points of view and a summary of what happened.