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Companies Lag on “Conflict Minerals” Reporting

Originally posted July 19, 2013 by David M. Katz on http://www3.cfo.com

Despite estimates that put the costs of complying with the Securities and Exchange Commission’s “conflict minerals” rule as high as $16 billion, many corporate executives say their companies don’t have a clue about whether they would be subject to the regulation, according to a new survey.

Public companies must comply with the SEC’s Conflict Minerals Rule for the calendar year beginning January 2013, with the first reports due May 31, 2014. Yet almost half of 900 finance, internal audit and other executives responding to PricewaterhouseCoopers’ online survey say their companies have only just begun to launch their compliance efforts.

Sixteen percent of the respondents say their companies haven’t even started to gather compliance information pertaining to the rule, which was mandated under the Dodd-Frank Act and requires companies to publicly disclose their use of certain minerals from the Democratic Republic of the Congo (DRC) or an adjoining country.

The regulation was mandated based on the U.S. Congress’s sense that “the exploitation and trade of conflict minerals originating in the Democratic Republic of the Congo is helping to finance conflict characterized by extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual and gender-based violence, and contributing to an emergency humanitarian situation,” according to the rule.

Thirty-two percent of the respondents to the PwC said their companies are still determining whether the rule applies to them. Under it, companies are required to disclose their use of tantalum, tin, tungsten or gold (commonly called the “3TG” minerals) or if they are “necessary to the functionality or production of a product” manufactured by the companies.

The minerals are found in “thousands of products ranging from cell phones and laptop computers to jewelry, golf clubs, drill bits and hearing aids,” according to the report, which cited estimates that “6,000 SEC issuers will have to provide new disclosures under the rule.”

Further, about 275,000 non-public companies that are part of the issuers’ supply chains will be affected, according to the report.

The disclosures, which must be made on a new form to be filed with the SEC called Form SD,could entangle some companies in an elaborate quest for information from the most remote rungs of their supply chains in order to file what could be a fairly extensive report.

The process will be “very different” from other forms of SEC reporting, Bobby Kipp, a partner in PwC’s risk assurance practice, told CFO. “It cannot be done completely or solely by finance,” she says. To be sure, nearly 60 percent of the respondents to the Big Four firm’s study have roles in an SEC reporting and finance function. Twenty-five percent come from internal audit, and the remainder work in legal, supply-chain, sustainability, accounting and auditing, and other areas.

Another unique element in the requirement is that it causes a company to rely heavily on suppliers and other third parties for information, “rather than on something companies can control internally,” she said.

“The single most challenging task for companies is getting accurate information from their suppliers,” according to the report. Asked “How many direct material suppliers are in your supply chain (materials used in products only),” in fact, 34 percent said that they were not sure or that the question didn’t apply to their company. And more than 26 percent said they had more than 1,000 suppliers.

To comply with the rule, many companies might have to identify how deep in the chain to go to unearth the most current information about the minerals, according to PwC. Yet 58 percent of companies have not yet made that determination.

In fact, in testimony before the House Committee on Financial Services Subcommittee on International Monetary Policy and Trade on May 10, 2012, Frank Vargo, National Association of Manufacturer’s vice president for international economic affairs, said that the rule should “be consistent with the realities of global supply chains, and acknowledge the practical limitations that issuers face in attempting to influence the behavior of other parties in supply chains that stretch from downstream users across multiple tiers of suppliers to refiners/smelters and mines.”

Many companies may be waiting for the outcome of a lawsuit against the SEC filed by the U.S. Chamber of Commerce and the National Association of Manufacturers in October 2012.

NAM, which has been a vocal opponent of the regulation, disputes an SEC estimate that the initial cost of complying would range between $3 billion and $4 billion. For its part, the association contends that implementation will cost manufacturers $9 billion to $16 billion. It estimates that the average large company has 2,000 companies in its supply chain.