Section 1502 of the Dodd-Frank Act
will require public companies to disclose and possibly audit its manufacturing process when it is believed they may be using so-called conflict minerals from the Democratic Republic of Congo and neighboring countries. It is believed that country uses the proceeds of sales of those minerals to finance sexual and gender-based violence and exploitation in the war-ravaged nation. Under the law, the SEC is supposed to draw up rules that will require companies to conduct supply chain due diligence, third party verification and possibly audits of sources such metals as tin, tantalum, tungsten and gold.
Meanwhile, over the past six months the Big 4 audit firms and some law firms have published advice for their clients and potential clients with the expectation that the rule will be in place for early 2012. Here are the white papers, reports and one client memo that I think are worth reading …
- Dodd-Frank Conflict Minerals Disclosure Requirements Expected to Affect Thousands of Public Companies in 2012, Proskauer client alert, Sept. 21, 2011. Excerpt: Section 1502 is intended to stop the exploitation and trade of conflict minerals in the DRC, which Congress believes is helping to finance the conflict in the region. For years, various non-governmental organizations have sought to influence companies that use these minerals in their products to commit to source only conflict-free minerals. Section 1502 will require companies to disclose whether or not they use conflict minerals from DRC countries in their products. NGOs will then likely use public pressure to target companies that use or are unable to verify that they do not use conflict minerals to change their sourcing or improve supply chain controls. The proposed SEC rules' broad reach is expected to affect many industries, including electronics, automotive, construction, medical equipment, industrial equipment and machinery, aerospace, lighting and jewelry. Depending on how the final rules are written, retailers and financial institutions may also be affected. A commercial bank, for instance, has stated that it expects to fall within the scope of the new rules because it issues credit cards that include covered elements. Retailers could be affected if they are involved in the manufacturing of products they carry or have products manufactured specifically for them. The SEC estimates that approximately 6,000 public companies will be affected, with industry groups predicting even higher numbers.
- A Closer Look: The Dodd-Frank Wall Street Reform and Consumer Protection Act – Impact On Disclosures Related to Use of ‘Conflict Minerals,’ PwC, April 2011. Excerpt: The significant challenge for companies who use these minerals, given the current lack of transparency into the metals supply chain, will be demonstrating that their minerals are not sourced from DRC countries – or, if they are sourced from DRC countries, demonstrating an adequate chain of custody out of the region. The sheer number of intermediaries and the degree of intermingling of these minerals along the supply chain adds considerable complexity. Companies will need to: examine the products they manufacture…; examine their procurement processes and supply chain information and communicate with suppliers to understand the extent of sourcing …; develop due diligence policies, procedures, and documentation surrounding the source and chain of custody of the minerals used; engage an independent private-sector firm to audit the due diligence procedures and findings included in the conflict minerals report …; and use the information sources from these processes to comply with the disclosures required by the act.
- The Dodd-Frank Act’s Impact on Public Companies: After One Year, Deloitte, Aug. 23, 2011. Excerpt: …The affected companies would be required to furnish, in a separate report, “a description of the measures taken by the [company] to exercise due diligence on the source and chain of custody of its conflict minerals.” This report would have to be audited by an “independent private sector auditor” in accordance with the standards of the Government Accountability Office. While the act set a deadline of April 2011 for final rules for all three of these provisions, none of the three have yet been adopted; the SEC expects to adopt final rules in the late summer or early fall of 2011. … Unlike the other specialized disclosure proposals, whose impacts are expected to be limited to certain industries, the effect of the conflict minerals provision is expected to be far-reaching. The reasons include: the designated conflict minerals are used in the production of numerous products in many industries, including electronics, technology, telecommunications, aerospace, automotive, health care devices, industrial products, and jewelry manufacturing; and the SEC proposes to include both manufacturers and companies that contract for the manufacture of their products, including retailers with private-label products where the retailer influences the manufacturing process. In fact, the SEC estimated that as many as 6,000 public companies could be affected, and it is not surprising that of the three specialized disclosure proposals, the one involving conflict minerals has generated the most interest.
- Conflict Minerals Provision of Dodd-Frank: Immediate implication and long-term opportunities for companies, KPMG, August 2011. Excerpt: Based on extensive experience with past due diligence and reporting requirements, KPMG has developed a simple process that involves the following key steps: identify use of 3TG conflict minerals in products manufactured or assembled; identify and survey suppliers of 3TG metals; perform a risk assessment using tools and OECD guidelines; prepare disclosure statements in accordance with SEC requirements; engage third party to perform an independent conflict minerals audit; and institutionalize a process so to update with ease on an annual basis. KPMG successfully tested this approach with a U.S.-based electronics corporation with global operations, and thousands of worldwide suppliers. In the face of imperfect information and gaps in supplier data, KPMG worked with the company’s procurement group that is leading the implementation of this initiative to drive towards meeting “significant and reasonable” due-diligence requirements. Gaps in internal and external processes were identified and an action plan put in place to bridge the gaps by December, 2011. OECD guidelines, industry best practices for supply chain due diligence, and questionnaires available from EICC-GeSi were referenced during the course of the project.
- Conflict Minerals: Dodd-Frank Section 1502 and Proposed SEC Rule, Ernst & Young, April 12, 2011. Excerpt: The SEC has proposed a three-step disclosure process – Assessing the applicability of the conflict minerals provisions: The issuer will first need to determine if any of its manufactured products contain conflict minerals and whether, as to each product, such minerals are necessary to the functionality of the manufactured product or (2) the product’s production process; Determining whether conflict minerals originated in DRC countries: Issuers utilizing conflict minerals necessary to the functionality of a manufactured product or the product’s production process would be required to disclose in their annual report, under the separate heading “Conflict Minerals Disclosure,” whether their conflict minerals originated in the DRC Countries; and Conflict Minerals Report: If an issuer determines that its minerals are from the DRC countries, or concludes that it cannot determine that the minerals did not come from the DRC countries, the issuer would move to the third step, requiring the following actions – disclose this conclusion in its annual report, furnish a Conflict Minerals Report as an exhibit to its annual report, disclose and post its Conflict Minerals Report on its website.
By now you’ve most likely heard of the conflict minerals disclosure section in the voluminous Dodd-Frank Wall Street Reform and Consumer Protection Act. For those companies who might be affected by the new proposed SEC regulations, it’s officially time to start planning for implementation.
I issue this warning based on the fact the SEC is now six months behind schedule on issuing a final rule and the fact the agency has scheduled a roundtable on the topic Oct. 18 from 12:30 p.m.-5:15 p.m. at its Washington, D.C. headquarters. According to an SEC statement issued last week, the roundtable is designed to be a forum for various stakeholders to discuss appropriate reporting approaches for the final rule, challenges in tracking conflict minerals through the supply chain, and workable due diligence.
“We are committed to writing an effective rule as soon as possible, and the roundtable will help us do that,” said Meredith Cross, director of the SEC’s Division of Corporation Finance.
Here’s a short primer on the conflict minerals rule, as it is written now: (the SEC is hoping to make the rule effective by January 2012)