Apple, Boeing Among Thousands Explaining Metal Origins to SEC

Source: BHP Billiton Ltd. via Bloomberg

BHP Billiton Ltd.'s United Kingdom Petroleum, in Liverpool Bay. Close

BHP Billiton Ltd.'s United Kingdom Petroleum, in Liverpool Bay.

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Source: BHP Billiton Ltd. via Bloomberg

BHP Billiton Ltd.'s United Kingdom Petroleum, in Liverpool Bay.

Apple Inc. (AAPL), Boeing Co. (BA) and thousands of other U.S.-listed manufacturers must scrutinize their purchases of four metals to make sure they don’t help fund human-rights abuses in Africa, according to a Securities and Exchange Commission rule adopted yesterday.

The regulator is instructing companies that build products with tin, tantalum, tungsten and gold -- metals contained in virtually any device with an on switch -- to make “reasonable” attempts to find out if the materials came from Democratic Republic of Congo mines supporting violent armed groups.

The final rule eased a requirement in the agency’s 2010 proposal that would have required companies to prove their metals didn’t come from the mines. Instead, the firms may report they found no evidence of a link.

“Issuers that are required to file reports with us will need to determine if they manufacture, or contract to manufacture, products that contain conflict minerals,” SEC Chairman Mary Schapiro said before the vote. Schapiro said the agency made several changes to what it proposed 18 months earlier to “address concerns about the cost.”

The so-called conflict-minerals rule and another adopted yesterday requiring energy and mining companies to report payments they make to governments were inserted into the 2010 Dodd-Frank Act to support foreign-policy objectives. The conflict mineral disclosures, which the SEC said will cost as much as $4 billion for companies to establish procedures and deliver their first reports, are meant to undermine funding for armed groups terrorizing people in central Africa.

‘Good-Faith’ Efforts

Under the conflict minerals rule, any company that makes -- or pays others to make -- products using the four metals must make “good-faith” efforts to determine where the materials were mined. Companies including retailer Wal-Mart Stores Inc. (WMT) that simply attach their logos to generic manufactured goods that include the metals are exempted from the requirement.

If the companies’ inquiries don’t show the metals might have been mined in the Democratic Republic of Congo or were exported from surrounding countries, they can stop looking and report that to the SEC. Also, if they find the metals were recycled or scrap, the firms need look no further.

Any indication the metals might come from the central African zone around the Democratic Republic of Congo requires the companies to pursue a deeper study on the origins and produce an audited report, the rule says. Either way, the findings must be reported once a year to the SEC, starting May 31, 2014.

‘Conflict Undeterminable’

In another change from the 2010 proposal, the SEC will also allow companies that can’t determine whether their metals came from the conflict zone to say they are “Conflict Undeterminable” for the first two years for large companies and four years for smaller ones.

Anticipation of the SEC decision has already had an impact in central Africa, with tin and tantalum exports from the region dropping more than 90 percent last year, according to provincial mines ministry statistics. The Democratic Republic of Congo’s share of world tin sales dropped from about 4 percent in 2008 to 2 percent last year, according to the U.S. Geological Survey.

The country’s mines ministry -- led by Martin Kabwelulu, who said in a phone message that he was “satisfied with the ratification by the SEC” -- has been working with industry groups on a program certifying conflict-free metals inside the country to stave off a de facto embargo of the nation’s materials.

Possible Litigation

Michael Littenberg, a New York lawyer at Schulte Roth & Zabel LLP who has worked on conflict-minerals compliance, predicted a “high likelihood” that this rule will be challenged in court, saying “at least a few potential challengers undoubtedly are eagerly awaiting the SEC’s final release,” which will detail the full rule and its justifications.

Last year, the SEC lost a court challenge accusing it of insufficient work measuring costs and benefits of an unrelated rule. In the wake of that loss, the agency has put more emphasis on cost-benefit analysis and revised this rule from an original compliance estimate of $71 million into the billions.

The two Republicans on the five-member commission opposed the rule, arguing that foreign policy isn’t an appropriate role for the securities regulator and that there’s no proof it will work.

“I do not like to see social or foreign policy provisions engrafted onto the securities laws,” said Republican Commissioner Daniel Gallagher, who said he fears the rule “will raise false hopes” of a trickle-down effect that may never ease suffering in Africa. He made similar arguments when he later registered the sole no vote on yesterday’s other rule.

Government Payments

That rule, to require natural-resource companies such as Exxon Mobil Corp. (XOM), BP Plc (BP/) and BHP Billiton Ltd. (BHP) to disclose how they pay governments -- including the U.S. -- to tap their resources was adopted 2-1. Schapiro, who formerly served on the boards of Duke Energy Corp. (DUK) and Cinergy Corp., and Republican Commissioner Troy Paredes recused themselves from the vote.

In a compliance effort the SEC estimated could cost the companies as much as $1 billion, they must start producing the disclosures for their fiscal year starting after Sept. 30, 2013. The payment reports are meant to combat corruption in developing nations and will detail taxes, royalties and fees greater than $100,000. Industry groups such as the American Petroleum Institute have argued that this will hand important information about U.S.-listed companies’ strategies to their competitors.

-- With assistance from Michael J. Kavanagh in Kinshasa. Editors: Anthony Gnoffo, Lawrence Roberts

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Gregory Mott at gmott1@bloomberg.net

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