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SEC approves conflict minerals provisions, includes audit requirement

The Securities and Exchange Commission approved disclosure rules on Thursday that are designed to enhance transparency in mineral resource extraction as mandated by the 2010 Dodd-Frank Act.

Two provisions of Dodd-Frank advocated by human rights organizations are aimed at ending the so-called “resource curse” in which nations like the Democratic Republic of the Congo are rich in resource wealth but are rife with violence and corruption, according t Journal of Accountancy.

Section 1502 of Dodd-Frank mandates annual reporting on whether U.S. firms utilize conflict minerals originating in the DRC or neighboring nations.

Section 1504 requires U.S. resource extraction firms to disclose in annual reports any payments made to foreign governments to access natural resources. Supporters of the provision say that the rule would force government leaders to be accountable in those countries and would also ensure that the money paid to governments is used to benefit the population, Journal of Accountancy reports.

In a comment letter to the SEC, seven human rights groups said that the rule has “enormous potential” to impact countries like the DRC.

“While the DRC government must take up its responsibilities to protect civilians and establish governance and infrastructure, U.S.-based companies and consumers also have a crucial role,” the groups said, according to Journal of Accountancy. “We are all connected to the conflict through the minerals we use in so many everyday items.”

Troy Paredes and Daniel Gallagher, the two dissenting commissioners, said that the rule did not adhere to the SEC’s mission of protecting investors. Gallagher argued that the rule may have an adverse effect on the people it aims to protect because it could create an economic embargo and force other countries as U.S. issuers to withdrawal business from the region.

Firms will be required to determine whether the products they manufacture contain conflict minerals. If so, firms will then be required to determine whether they helped to finance armed groups in the DRC or neighboring nations, Journal of Accountancy reports.

Additionally, an independent private-sector audit of firms’ minerals reports will be required. John Fieldsend, special counsel at the SEC, said that the audit must be conducted according to standards established by the Government Accountability Office.

Business groups, however, argue that the statute could be detrimental to American industry.

John Felmy, the chief economist at the American Petroleum Institute, said that the rule is a “Draconian approach to disclosure that will unnecessarily harm U.S. competitiveness and jobs,” according to Journal of Accountancy.

Felmy also said that the rule will require energy firms to publicize sensitive information that could assist foreign competitors in undermining U.S. bids for resource contracts.

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