Preparing for the Conflict Minerals Rule
Starting next spring, publicly held retail companies will be required to begin reporting to government regulators whether private label merchandise they sell contains “conflict” gold or other minerals from the Democratic Republic of the Congo and surrounding areas. But the new Securities and Exchange Commission rule has launched widespread controversy on whether compliance is possible, let alone practical, and whether retailers should be included under a requirement that Congress intended only for manufacturers.
The “Conflict Minerals Rule” was mandated by Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and focuses on raw materials originating in central Africa, where rebel groups have attempted to pay for weapons through the sale of various precious metals and rare earths. In addition to gold, covered minerals include columbite-tantalite (the primary ore for tantalum), cassiterite (the primary ore for tin) and wolframite (a major source of tungsten). Companies whose manufacturing supply chains involve the minerals face a May 31, 2014, deadline to file their first annual report with the SEC stating whether any of their products contain materials that originated in the Congo, Angola, Burundi, Central African Republic, Rwanda, South Sudan, Tanzania, Uganda or Zambia.
Impact on retail
While the regulations apply primarily to manufacturers, they have significant implications for retailers as well. Most privately held retailers and retailers selling only third-party merchandise are not affected, nor are those who simply place their brand on a generic product. But the regulations do cover retailers who “contract to manufacture” private label merchandise and are considered to have “some actual influence over the manufacturing of that product.”
Even with those conditions, an NRF survey of larger retailers found 71 percent believe they exercise sufficient influence over their private label goods that they would be affected. About two-thirds thought jewelry, clothing, accessories and footwear that they sell would be covered, along with close to a third for housewares and a quarter for electronics and furniture.
In October 2012, a lawsuit challenging the regulations was filed in U.S. District Court in Washington by the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable, with NRF filing a brief in support of the suit. It was hoped that the court would void the rules and relieve the retail industry from their requirements. This June, however, the court rejected the challenge and ruled in favor of the SEC.
NAM and the other plaintiffs have appealed the ruling, and NRF in September filed a friend-of-the-court brief arguing that Congress did not intend for retailers to be covered at all.
“The SEC’s regulation makes no practical sense,” NRF wrote in the brief. “Manufacturers and retailers have fundamentally different functions in the commercial world and they have fundamentally different obligations under the statute at issue here.”
NRF said Dodd-Frank only gave the SEC authority to impose the rules on manufacturers, not retailers who contract with manufacturers even if the merchandise is custom-made.
“A manufacturer, by definition, must know about the materials and parts that go into its products,” NRF said. Retailers ordering products, by contrast, have “little more ability to learn about and control the source of their components than a consumer who custom orders furniture.”
The regulations apply to products clearly containing metals such as jewelry and electronics but also cover less-obvious merchandise such as some apparel and even cosmetics. NRF has argued that even if a retailer knows what minerals are in its products, it is difficult to know the source: a “significant lack of infrastructure” in the Congo makes it difficult for retailers to track the origin of minerals “with any degree of reliability or accuracy,” and smelters and refiners present “significant choke points” in obtaining information about the region’s mines. Material such as gold, which can be melted down and reused in products as varied as jewelry and computer circuit boards, is virtually untraceable.
Even the SEC is split over the regulations, which were approved in a narrow 3-2 vote in August 2012. Then-chairwoman Mary Schapiro said the violence in the Congo “profoundly affects our national interest.” But commissioner Dan Gallagher argued that the SEC should focus on its mission of protecting investors and is “not the right tool for this job.” Commissioner Troy Paredes said the regulations could lead to a de facto embargo on Congo materials that would create “more hardship” there.
Some retailers oppose the regulations, and even those who are willing to work within them acknowledge that compliance will be difficult.
Signet Jewelers vice president of corporate affairs David Bouffard testified before the SEC on behalf of NRF, telling the commission that “the jewelry and retail industries as a whole abhor the horrific human rights abuses in the DRC” and that his company hoped to “ensure to the maximum extent possible that the products sold in our stores do not contain any gold originating from conflict mines.” But he added that lack of clear international standards or reliable infrastructure for tracking the origin of Congo-area minerals makes retailers dependent on their suppliers for the accuracy of information.
Short of a court ruling overturning the regulations, large retailers will need to demonstrate a good-faith effort to comply. That would involve a system of certifications, beginning at the mine and flowing throughout the supply chain, showing that the materials in a company’s products come from somewhere other than the covered countries — or that the company is actively seeking alternative suppliers.
“As a retailer, you’re responsible for making certain that your source of supply is untainted,” NRF vice president for supply chain and customs policy Jonathan Gold says. Until the court case is resolved, “We encourage retailers to begin working with their suppliers to determine whether the products they sell contain any of the minerals specified in the law.”
A detailed implementation and compliance guide is available to NRF members at www.nrf.com/conflictminerals.