Electronics Industry Continues to Wait for Conflict Minerals Regulations

Although provisions in the Dodd- Frank Wall Street Reform Act required the U.S. Securities and Exchange Commission (SEC) to issue conflict minerals regulations by April 2011, the SEC has yet to finalize the regulations it proposed in December 2010. While some companies appreciate that the SEC is taking the time needed to address several difficult reporting issues, others are nervously eyeing a potential 2012 start to the reporting requirements. Human rights interest groups and their Congressional supporters have been far less patient, urging the SEC to issue the regulations as soon as possible.

Under Section 1502 of the regulations passed in July 2010, publicly traded companies will be required to provide costly reports to the SEC if their products contain “conflict minerals” from the Democratic Republic of the Congo (DRC). The new law will apply to manufactured goods containing tin, tantalum, gold, and tungsten.

Although the reporting requirements apply only to publicly traded companies, it is expected that the requirements will rapidly flow through the entire supply chain. The need for compliance data could spread through the industry in a manner similar to the RoHS compliance data requests that proliferated through the supply chain, but much more rapidly.

On October 18, 2011, the SEC held a multi-stakeholder roundtable discussion. The purpose of the panel discussions appeared to be collection of further information and opinions regarding provisions of the forthcoming rules required under Section 1502 of the Dodd-Frank Act. Most of the questions posed to the panel reiterated issues that were raised in the SEC’s December 23, 2011 proposed rule. It was unclear why the panel was held at this time, but one could infer that the SEC is still unclear as to what direction it should move and was hoping to find some type of consensus. Questions asked by SEC staff were focused on what is covered by the rule, what steps will be required to comply with the rule, and reporting issues.

Some of the questions about what the rule covers included defining the specific metals covered, transition rules for stockpiled materials, necessary reporting for recycled materials, reporting by companies without control over the product, whether the regulations should offer a de-minimis level, and whether the SEC should define what constitutes a “reasonable country of origin inquiry.” One of the more complex issues is the meaning of “necessary to the functionality” which is used in the law to define uses of conflict minerals for which reporting is required. The proposed rules do not include de-minimis. The SEC also asked about industry’s need for transition time to implement the regulation.

Regarding steps required for compliance, the SEC asked whether the SEC should specify required due diligence and whether the regulations should reference the OECD guidance. Questions were also asked regarding required audits with an eye toward improving cost effectiveness. On the topic of reporting, the SEC asked whether a synchronized calendar year end would increase efficiency in reporting.

In October 2011, the Tulane University Law School issued an economic impact study of the legislation. The study, which drew heavily on data from the IPC survey of the electronics industry, assessed the costs of implementing the Dodd-Frank conflict minerals regulation to be $7.93 billion — more than one hundred times greater than the estimate prepared by the U.S. SEC of $71.2 million. The study, “A Critical Analysis of the SEC and NAM Economic Impact Models and the Proposal of a Third Model in View of the Implementation of Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act,” was prepared at the request of U.S. Senator Dick Durbin of Illinois, a co-sponsor of the conflict minerals provisions included in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC is under pressure from non-governmental organizations (NGOs) and the sponsors of the legislation to issue regulations immediately. However, based on the October 18th SEC panel discussion and the reopening of the record for public comment until November 1, 2011, it appears unlikely that the SEC will issue a regulation before December 2011. Because the legislation calls for reporting to begin in the year following the issuance of the regulations, companies are concerned that if the SEC issues the rule in December, there would be no transition time for companies to familiarize themselves with the rule and prepare to comply. To alleviate this situation, it is hoped that the SEC will wait until January 2012 to issue the regulations.

IPC is not sitting around waiting for the regulation, but instead continues our efforts to minimize the impact of the regulation on our members. IPC submitted extensive comments on the proposed rule to the SEC. The comments identified a significant underestimation by the SEC of the financial impact of the rule, provided the SEC with an overview of the complexities of the electronics supply chain, the difficulties of complying with the anticipated regulation, and suggested ways that the SEC could reduce the anticipated burden and associated costs of the proposed rule.

As a result of industry lobbying which was focused on the House and Senate committees of jurisdiction and leadership, a letter was sent in July from the Chairman (Spencer Bachus) of the House Financial Services Committee to the Chair of the SEC in support of our position.

IPC and its members are also participating in a number of projects intended to assist the industry with the expected regulation. IPC has begun development of a data exchange standard to help the electronics manufacturing industry share compliance data. The IPC data exchange standard will build upon the due diligence communication tool recently released by the EICC and GeSI and utilize the sophistication of an XML schema incorporated in the IPC-175x family of IPC standards. Additionally, IPC and several of its members will be participating in a pilot study of OECD guidance on due diligence, which may form the basis of future U.S. due diligence requirements. Separately, another IPC group has begun development of guidance specifically for the electronic interconnect industry.

For more information or to get involved in the development of the data exchange standard, contact Fern Abrams, IPC director of government relations and environmental policy, at +1 703-522-0225.

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