Walmart (NYSE:WMT) and a group of other national retailers met with the Securities and Exchange Commission (SEC) earlier this year to discuss a new required disclosure of sources for conflict minerals used in their private label goods. The companies are arguing that they should not have to comply because they are not directly involved in the manufacturing process.

"Conflict minerals" is the term used for four minerals found in a wide variety of consumer goods: gold, tantalum, tin and tungsten. These minerals are used in the manufacture of cell phones, DVD players, lightbulbs and even airplanes. Some of these minerals come from Central Africa and other areas that have been ravaged by war and insurgency.

The United Nations reports that Congolese rebel groups, backed by Rwandan military, are making tens of millions of dollars a year by controlling the sale of these minerals, allowing the continuation of a war that has so far displaced or killed millions of people.

Regulation Against Conflict Minerals
In 2010, the Dodd-Frank Wall Street Reform and Consumer Act ("Dodd-Frank") became law. The congressional legislation focused mainly on changing banking and investment firm practices, but contained a clause that requires that all American manufacturers trace their sources of conflict minerals and publicly report them. All manufacturers must comply by 2014, but some will have to report on their 2011 production in 2012.

The confusion that Walmart and other retailers want to clear up is whether they meet the definition of a "manufacturer" on store label products that they commission. For example, Walmart produces several lines of consumer ware under various Walmart labels, such as George, Mainstays and Great Value. The company contracts with manufacturers to produce and package the product using the Walmart branding. Walmart's argument to the SEC is that they do not have any direct control over the manufacturing process in these cases and therefore, should fall outside of the law.

The difficulty that all manufacturers face with the new law is two-fold. First, it may be challenging to define the ultimate source of these minerals, as some come through "middle men" who may not identify their source. The second issue is that if the companies do use conflict minerals, they can still sell their products, but must label these products as their own. That is tantamount to the companies admitting that they are supporting the continuing war in the Congo, which could result in a marketing disaster.

Industry groups are also concerned about the application of the Dodd-Frank legislation. Manufacturers may find it easier to proactively source these minerals from other countries, rather than do the due diligence it takes to ensure that their African sources are conflict-free. Mining is the sole economic activity and source of income in many areas in Central Africa and losing mining contracts can have a disastrous impact on subsistence in the region.

On August 22, the SEC voted to approve the final law. The commission also included clearer and more detailed language as to when retailers are considered manufacturers. It specified that simply putting one's brand label on a product manufactured by another company does not qualify, but if the retailer has any input into the process, they step into the role of manufacturer. The SEC also pushed back full implementation to May 2014 to give companies more time to sort out how they will be able to comply.

The Bottom Line
Walmart and other large retailers are fighting against being labeled as manufacturers in order to avoid certain regulations of the Dodd-Frank legislation. The SEC has clarified Walmart's responsibility under the law. The accounting firm, KPMG, estimates that the law will apply to approximately half of all American publicly traded companies when it is fully implemented.

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