Conflict Minerals and the Fastener Distributor

A year ago, on December 15^th, the Securities and Exchange Commission “voted unanimously to propose measures, as mandated by the Dodd-Frank Act, which would require new disclosures by reporting issuers concerning conflict minerals that originated in the Democratic Republic of the Congo or an adjoining country.” [Text clipped from SEC news release]

Many of us know about the Dodd-Frank Wall Street Reform and Consumer Protection Act – H.R. 4173. The intent of the bill, in its own words, To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes is a noble gesture from our cock-eyed Congress. But, what’s with the Congo connection, eh? As it is with any national endeavor that takes on an international scope, it’s both simple and complicated.

The Democratic Republic of the Congo is the battleground for a dozen-year armed struggle between ethnic militias, the funding for whom is based mostly on black-market activity. As in any war, the civilian toll from disease and starvation, let alone from bullets, has been massive (multimillions dead) and infinitely regrettable. In an attempt to cut off funding for the warring parties, the United Nations put out a report in 2009 calling on the Security Council to act against the Hutu militias who were using sales from gold and cassiterite deposits in northern Congo to finance the continuing slaughter. To date, the UN has not issued formal guidelines regarding their own report. So, in Section 1502 of the Dodd-Frank Act (page 838, for those of you who like to keep track of the deforestation of America by our Congress), we, the people, take it upon ourselves to try and accomplish what the Army of the DRC can’t, and the United Nations apparently won’t, do – force the Hutus and what’s left of the Tutsis to make nice by taking a bite out of their cash flow.

Still don’t understand what this has to do with you, Mister & Ms. Fastener Distributor? Let’s go back to the SEC announcement from a year ago, and then back to the text of the Act (you can get your own copy of the full legislation here). The intent of the Act was to empower the SEC to require public corporations under its authority to identify the sources of certain minerals (gold, tin [for which cassiterite is the primary ore source], columbite-tantalite [aka “coltan,” used primarily in electronic capacitors], and wolframite [the primary source for tungsten, a popular hardening element in tool steel]). As part of the due diligence requirement set forth by the SEC measures, public companies are required to survey their supply chain in a thorough manner regarding the origin of any instance where a mineral on the list (both the SEC and the State Department reserve the right to expand its contents moving forward) is used in any phase of production, including off-site production and purchased material necessary to realize a final product.

It isn’t completely clear as yet regarding the strict definition of conflict minerals utilization. Potentially, the entire supply chain could be set off on a paper chase that makes the initial implementation of RoHS look like a walk around the park. Every cold-headed, hot-headed and machined fastener in your inventory was struck by tool steel … containing tungsten … forged out of wolframite. Obviously, any gold or tin-plated fasteners or terminals may come under the microscope, but the origin for finishes is eminently easier to track down, if only through the generally shorter trail from plating to end-use. What’s that? You say you’re not under SEC jurisdiction? That your customers are all privately-held concerns? Yeah, but how about the corporate structure of their customers? It only takes one link to pull the whole chain into a compliance flow-down requirement under the Act.

Of course, much also depends on how the SEC chooses to follow up on public companies statements regarding the presence of these minerals in their products, such statements a required part of their annually-published corporate reports. The Commission is short-staffed these days and there are an awful lot of those annual reports issued, pitching in on the deforestation enterprise. That fact provides little comfort for companies such as Fastenal or MSC Industrial since, as publicly-traded entities, they’re directly in the line of fire in this matter.

The wording of the Dodd-Frank Act specifically charges the State Department with determining the effectiveness of the results of the SEC mission, presenting the possibility that the Commission, undermanned as it is, will institute an all-out blitz at some point if expected outcomes fail to be initially achieved. Who knows? Well, you don’t … because neither the NFDA nor the IFI has submitted any comment whatsoever during the periods set aside for the Act and for the SEC measures. As usual, the organizations you depend on to alert you to such matters are asleep at the wheel. As usual, it’s up to each of you to wake them up and find out just how bad (or totally meaningless) this turns out to be.