ACA and the Paint and Coatings Industry Address the Conflict Minerals Rule
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Over the past few years, there has been an increased focus on minerals mined in conditions of armed conflict and human rights abuses, or “conflict minerals,” as they have come to be known. In the Democratic Republic of the Congo (DRC), armed groups continue to commit human rights atrocities and profit from exploitation of minerals and other trades. In response, Congress included a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to address the trade of conflict minerals.
As required by Section 1502(b) of the law, the U.S. Securities and Exchange Commission (SEC) issued a rule in August 2012 that requires companies to disclose their use of conflict minerals and the origin of those minerals. Section 1502 defines conflict minerals as four metal ores — “columbite- tantalite (coltan), cassiterite, gold, wolframite, or their derivatives” — and any other mineral or derivatives that the U.S. Secretary of State determines is financing the conflict in the DRC region. The final rule released by the SEC defines “conflict minerals” as the four listed metal ores and the derivatives most commonly extracted from those ores — tantalum, tin, gold, and tungsten.
The American Coatings Association (ACA) and its membership fully support the efforts to end the humanitarian crisis in the DRC, as well as the intent of the legislation that authorized the SEC Conflict Minerals Rule. However, the rule is impaired by several factors: the lack of a de minimis threshold that would exempt those companies whose products may or may not contain a trace amount of a conflict mineral from reporting, which will make the cost of compliance for these companies significant; the undefined and purposefully vague terms and requirements, which has created confusion among those companies that are required to make disclosures about their use of conflict minerals; and the fact that the SEC fell short of its statutory obligation to evaluate the economic consequences of its action, either with respect to U.S. industry or the situation in the Congo. Notably, while the cost of compliance for affected companies will be significant — since they may have to test products to determine if any amount of conflict minerals remains — the impact on reducing human rights will be minimal since the amount of the mineral present in the product is minuscule.
The Conflict Minerals Rule is currently being litigated and, until a final determination in the case can be made, ACA urges Congress to exhort the SEC to address the issues laid out in this Issue Backgrounder.
This Issue Backgrounder offers an overview of the impact of the Conflict Minerals Rule on industry, specifically the more than $20 billion dollar paint and coatings manufacturing industry in the United States, which operates in all 50 states, and employs over 60,000 people engaged in the manufacture and distribution of its products. It also provides suggested considerations for revising the rule to allow clarity in compliance and not overly burden and disadvantage U.S. paint and coatings manufacturers and other affected industries.
The Basics of the Conflict Minerals Rule
On Aug. 22, 2012, the SEC voted 3-2 to adopt the Conflict Minerals Rule. The rule requires that U.S. publicly-traded companies disclose certain conflict minerals or derivatives used in their production processes. Congress included this provision in the Dodd-Frank Act in an effort to further the humanitarian goal of ending conflict in the DRC and the surrounding countries, including Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia (the Covered Countries).
The rule took effect on Jan. 1, 2013 and requires annual reporting, the first of which is due May 31, 2014. Annual compliance with the rule — which impacts some 6,000 SEC-reporting issuers and many more of their suppliers — is estimated to cost industry billions of dollars every year. All U.S. publically-traded paint and coatings companies that manufacture or contract to manufacture products for which conflict minerals are necessary to the products’ functionality or production are covered by the scope of the Conflict Minerals Rule, regardless of the amount of conflict minerals in their products.
The Need for a De Minimis Exemption
By failing to adopt a sensible de minimis exception, the SEC rule imposes wholly unreasonable and burdensome requirements on manufacturers who do not make significant use of conflict minerals in their products, but whose products may contain trace elements of such minerals (which most often will not originate in the Congo) as a result of manufacturing processes. The principle concern of the paint and coatings industry is tin, which is often used as a catalyst in polymer manufacturing. Because the SEC failed to adopt a judicious de minimis exception for those whose products may or may not contain mere trace amounts of conflict metals (e.g., tin) as a result of manufacturing processes (e.g., the use of catalysts) employed by third-party suppliers of ingredient materials at one stage, or more, in long upstream supply chains, an unnecessary and considerable burden has been imposed on manufacturers.
In the final rule, the SEC stated that catalysts are not considered “necessary for the production or functionality” of a product if the catalyst is completely washed away. Since no de minimis threshold exists, if a product contains any trace amount of tin (a catalyst that did not wash away completely), it falls within the scope of the rule. Due to the lack of a de minimis threshold, it is reasonable to project a large number of paint and coating manufacturers will be manufacturing products that contain some trace amount of tin and, therefore, will be covered under the rule. Because of the industry’s complicated supply chains and frequent formulation changes, the Conflict Minerals Rule will have a widespread impact on this industry. It is important to understand that paint companies are not intentionally adding tin to their products; rather, tin may be used to manufacture the raw materials incorporated into formulated coatings products. The trace amounts of tin that could end up in coatings products are often five to six links in a supply chain removed from the original source, creating a difficult path to trace the origin of the conflict minerals. Many chemical mixture formulators have similar compliance issues, due to their complex supply chains, that result from sourcing raw materials from multiple suppliers.
Other federal and state chemical statutes have included a variety of reporting thresholds such as de minimis, safe harbor levels, and practical quantitation limit (PQL). These reporting thresholds offer guidance that allow stakeholders to clearly understand if they are within the scope of the statute and develop clear compliance programs. The SEC should apply the same to its Conflict Minerals Rule.
Path to Compliance Unclear
Due to the purposely vague nature of the SEC Conflict Minerals Rule, the compliance path for the paint and coatings industry is unclear.
The SEC compels reporting companies to conduct a “Reasonable Country of Origin Inquiry” (RCOI) on all the conflict minerals used in their products. This requires the paint and coatings industry to contact their suppliers and request documentation that reasonably shows that any tin used in their manufacturing process was not mined in the covered countries. However, the SEC has failed to prescribe or explain what satisfies the reasonable requirement.
If, based on the RCOI, an issuer knows — or has reason to know — that it used conflict minerals which are necessary to the products’ functionality or production that originated in the covered countries and did not come from scrap or recycled sources, it must conduct due diligence with the supply chain. The SEC refers to the Organization for Economic Cooperation and Development’s (OECD) Guidance for Reasonable Supply Chains of Minerals from Conflict-Affected and High-Risk Areas to conduct proper due diligence. This guidance document was created as a voluntary program for manufactures using conflict minerals much further up the supply chain than coatings formulators. As such, there is little applicable guidance on how to conduct due diligence for paint and coatings manufacturers or other manufacturers of multi-component products.
Economic and Social Impacts Unknown
The SEC has acknowledged that it did not conduct any analysis of the specific costs or benefits of the numerous decisions made by the commission in determining which products and markets would be within the scope of the Conflict Mineral Rule’s due diligence and reporting requirements. In its discussions of the benefits and costs, the commission stated: “We are unable to quantify the impact of each of the decisions we discuss below with any precision because reliable, empirical evidence regarding the effects is not readily available to the commission, and commentators did not provide sufficient information to allow us to do so.” The SEC’s failure to conduct the necessary analysis has resulted in a final rule that imposes a broad array of impracticable obligations on manufacturers and suppliers with onerous costs to the U.S. economy, without any demonstration that the imposed requirements will further Congress’ humanitarian objectives in the Congo. While Congress focused its attention on the intentional use of metals derived from conflict minerals in computers, telephones, and jewelry, the SEC in its rule broadly sweeps in incidental, de minimis uses of the metals in such seemingly unrelated markets as house paints, food wrappers, toothpaste, and diapers. These requirements were neither analyzed by the SEC for their impact on efficiency, competition and capital formation, nor were they shown to be necessary or effective in advancing humanitarian goals in the Congo.
Experts on the DRC, including a former U.S. Assistant Secretary of State for African Affairs argue that the rule will likely worsen conditions in the DRC, since it incentivizes a permanent de facto embargo, as the SEC itself acknowledges. Unfortunately, the unintended consequences of the Conflict Minerals Rule may serve to undermine any good intent of the provision. Since Section 1502 was passed, the legal market for tin, tantalum, tungsten, and gold from the DRC has shrunk significantly, and the eastern provinces hardest-hit by conflict have been disproportionately harmed. Press reports and DRC experts confirm that, in anticipation of the SEC’s final rule, many companies have ceased sourcing minerals from the DRC and its neighbors. Miners and their families are more susceptible than ever to the armed groups. The conflict rages on, and armed groups have taken advantage of opportunities to smuggle or launder minerals at the expense of independent mines and exporters.
Conflict Minerals Rule in Court
The National Association of Manufacturers (NAM), the U.S. Chamber of Commerce and the Business Roundtable filed suit challenging the SEC’s final rule on conflict minerals disclosure on Oct. 19, 2012. In its filing, the U.S. Chamber of Commerce stated that “the conflict minerals rule is inconsistent with federal law and creates an unworkable system that will impose billions of dollars in costs on American businesses, large and small, with no clear benefits to the people of the Congo or the neighboring countries.” ACA took the lead in garnering critical information from its members and enlisting five other major industry trade groups to file an amicus brief in support of the lawsuit. While emphasizing our collective support for the goal of the legislative measure, the amicus brief highlighted the dire consequences and unnecessary burdens on manufacturers imposed by failing to adopt a sensible de minimis exception.
On July 23, 2013, the U.S. District Court for the District of Columbia rejected the plaintiffs’ objections to the conflict minerals rule and granted summary judgment to the SEC. The district court’s opinion turned largely on the court’s deference to the SEC under the arbitrary and capricious standard. The case has been appealed to the D.C. Circuit Court of Appeals, and that court will consider the challenge de novo, or “from the beginning.”
ACA and its membership reiterate their support of the efforts to end the humanitarian crisis in the DRC and the intent of the legislation that authorized the SEC rule. However, the rule lacks the statutorily required economic analysis and, therefore, should be set aside. Until a final determination in the case can be made, ACA advises Congress to push the SEC to take the following actions:
- Establish a de minimis threshold in the Conflict Minerals Rule;
- Issue guidance regarding the Reasonable Country of Origin Inquiry and due diligence requirements; and
- Vigorously analyze the economic and social benefits and consequences, both in the United States and the DRC.
For more information, please contact:
Marie Clarke, Counsel, Government Affairs; (202) 719-3682 or firstname.lastname@example.org
Stephen Wieroniey, Director, Occupational Health and Product Safety; (202) 719-3687 or email@example.com